UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

OR

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                  to

Commission file number 001-32319

Sunstone Hotel Investors, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Maryland	20-1296886
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification Number)

120 Vantis, Suite 350
Aliso Viejo, California	92656
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s telephone number, including area code: (949) 330-4000

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x  No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x	Accelerated filer o
Non-accelerated filer o	Smaller reporting company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o  No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

136,777,430 shares of Common Stock, $0.01 par value, as of November 1, 2012

SUNSTONE HOTEL INVESTORS, INC.

QUARTERLY REPORT ON

FORM 10-Q

For the Quarterly Period Ended September 30, 2012

TABLE OF CONTENTS

			Page
	PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements:
		Consolidated Balance Sheets as of September 30, 2012 (unaudited) and December 31, 2011	1
		Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2012 and 2011	2
		Consolidated Statement of Equity as of September 30, 2012 (unaudited) and December 31, 2011	3
		Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011	4
		Notes to Unaudited Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		25
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		47
Item 4.	Controls and Procedures		47
	PART II—OTHER INFORMATION
Item 1.	Legal Proceedings		48
Item 1A.	Risk Factors		48
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		48
Item 3	Defaults Upon Senior Securities		48
Item 4.	Mine Safety Disclosures		48
Item 5.	Other Information		48
Item 6.	Exhibits		49
SIGNATURES			50

i

PART I—FINANCIAL INFORMATION

Item 1.   Financial Statements

SUNSTONE HOTEL INVESTORS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

	September 30, 2012			December 31, 2011
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	164,469		$	149,852
Restricted cash	76,790			55,778
Accounts receivable, net	28,534			31,182
Inventories	2,664			2,517
Prepaid expenses	9,554			10,008
Assets held for sale, net	—			144,479
Total current assets	282,011			393,816
Investment in hotel properties, net	2,800,682			2,650,258
Other real estate, net	9,855			9,754
Deferred financing fees, net	12,865			14,421
Goodwill	13,088			13,088
Other assets, net	26,441			19,903
Total assets	$	3,144,942		$	3,101,240
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	25,267		$	26,310
Accrued payroll and employee benefits	22,326			20,727
Due to Third-Party Managers	9,050			9,039
Dividends payable	7,437			7,437
Other current liabilities	37,829			25,979
Current portion of notes payable	77,579			51,279
Notes payable of assets held for sale	—			124,543
Liabilities of assets held for sale	—			3,354
Total current liabilities	179,488			268,668
Notes payable, less current portion	1,318,102			1,394,655
Capital lease obligations, less current portion	15,630			—
Other liabilities	14,789			12,623
Total liabilities	1,528,009			1,675,946
Commitments and contingencies (Note 14)
Preferred stock, Series C Cumulative Convertible Redeemable Preferred Stock, $0.01 par value, 4,102,564 shares authorized, issued and outstanding at September 30, 2012 and December 31, 2011, liquidation preference of $24.375 per share	100,000			100,000
Equity:
Stockholders’ equity:
Preferred stock, $0.01 par value, 100,000,000 shares authorized.
8.0% Series A Cumulative Redeemable Preferred Stock, 7,050,000 shares issued and outstanding at September 30, 2012 and December 31, 2011, stated at liquidation preference of $25.00 per share	176,250			176,250
8.0% Series D Cumulative Redeemable Preferred Stock, 4,600,000 shares issued and outstanding at September 30, 2012 and December 31, 2011, stated at liquidation preference of $25.00 per share	115,000			115,000
Common stock, $0.01 par value, 500,000,000 shares authorized, 135,237,438 shares issued and outstanding at September 30, 2012 and 117,265,090 shares issued and outstanding at December 31, 2011	1,352			1,173
Additional paid in capital	1,492,528			1,312,566
Retained earnings	147,329			110,580
Cumulative dividends	(467,707		)	(445,396		)
Accumulated other comprehensive loss	(4,740		)	(4,916		)
Total stockholders’ equity	1,460,012			1,265,257
Non-controlling interest in consolidated joint ventures	56,921			60,037
Total equity	1,516,933			1,325,294
Total liabilities and equity	$	3,144,942		$	3,101,240

See accompanying notes to consolidated financial statements.

1

SUNSTONE HOTEL INVESTORS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share data)

	Three Months Ended September 30, 2012			Three Months Ended September 30, 2011			Nine Months Ended September 30, 2012			Nine Months Ended September 30, 2011
REVENUES
Room	$	156,725		$	139,824		$	443,022		$	380,826
Food and beverage	46,191			40,920			148,574			124,838
Other operating	18,163			16,743			51,243			45,454
Total revenues	221,079			197,487			642,839			551,118
OPERATING EXPENSES
Room	39,911			35,325			112,566			96,160
Food and beverage	34,616			32,366			104,426			93,165
Other operating	6,986			6,506			20,074			18,112
Advertising and promotion	10,740			9,669			31,760			27,250
Repairs and maintenance	8,299			7,775			24,561			22,094
Utilities	7,686			7,867			21,039			20,914
Franchise costs	8,306			7,282			22,443			19,046
Property tax, ground lease and insurance	18,102			16,484			52,237			43,641
Property general and administrative	24,493			22,881			73,202			64,595
Corporate overhead	6,148			6,852			18,975			20,771
Depreciation and amortization	36,529			32,490			102,899			88,241
Impairment loss	—			10,862			—			10,862
Total operating expenses	201,816			196,359			584,182			524,851
Operating income	19,263			1,128			58,657			26,267
Equity in earnings of unconsolidated joint ventures	—			—			—			21
Interest and other income	18			1,543			155			2,970
Interest expense	(19,709		)	(20,021		)	(59,309		)	(55,449		)
Loss on extinguishment of debt	—			—			(191		)	—
Gain on remeasurement of equity interests	—			—			—			69,230
Income (loss) from continuing operations	(428		)	(17,350		)	(688		)	43,039
Income from discontinued operations	39,984			797			39,131			30,672
NET INCOME (LOSS)	39,556			(16,553		)	38,443			73,711
(Income) loss from consolidated joint venture attributable to non-controlling interest	(827		)	31			(1,694		)	(213		)
Distributions to non-controlling interest	(8		)	(8		)	(24		)	(22		)
Preferred stock dividends	(7,437		)	(7,437		)	(22,311		)	(19,884		)
Undistributed income allocated to unvested restricted stock compensation	(352		)	—			(162		)	(638		)
INCOME AVAILABLE (LOSS ATTRIBUTABLE) TO COMMON STOCKHOLDERS	$	30,932		$	(23,967	)	$	14,252		$	52,954
COMPREHENSIVE INCOME (LOSS)	$	39,615		$	(16,553	)	$	38,619		$	73,711
Basic per share amounts:
Income (loss) from continuing operations available (attributable) to common stockholders	$	(0.07	)	$	(0.21	)	$	(0.20	)	$	0.19
Income from discontinued operations	0.30			0.01			0.31			0.26
Basic income available (loss attributable) to common stockholders per common share	$	0.23		$	(0.20	)	$	0.11		$	0.45
Diluted per share amounts:
Income (loss) from continuing operations available (attributable) to common stockholders	$	(0.07	)	$	(0.21	)	$	(0.20	)	$	0.19
Income from discontinued operations	0.30			0.01			0.31			0.26
Diluted income available (loss attributable) to common stockholders per common share	$	0.23		$	(0.20	)	$	0.11		$	0.45
Weighted average common shares outstanding:
Basic	135,236			117,254			124,271			117,186
Diluted	135,236			117,254			124,271			117,186
Dividends declared per common share	$	—		$	—		$	—		$	—

See accompanying notes to consolidated financial statements.

2

SUNSTONE HOTEL INVESTORS, INC.

CONSOLIDATED STATEMENT OF EQUITY

(In thousands, except share data)

																				Non-
																				Controlling
	Preferred Stock						Common Stock										Accumulated			Interest in
	Series A			Series D						Additional							Other			Consolidated
	Number of			Number of			Number of			Paid In		Retained		Cumulative			Comprehensive			Joint
	Shares	Amount		Shares	Amount		Shares	Amount		Capital		Earnings		Dividends			Loss			Ventures			Total
Balance at December 31, 2011	7,050,000	$	176,250	4,600,000	$	115,000	117,265,090	$	1,173	$	1,312,566	$	110,580	$	(445,396	)	$	(4,916	)	$	60,037		$	1,325,294
Issuance of common stock, net (unaudited)	—	—		—	—		17,597,437	176		177,086		—		—			—			—			177,262
Vesting of restricted common stock (unaudited)	—	—		—	—		374,911	3		2,876		—		—			—			—			2,879
Distributions to non-controlling interest (unaudited)	—	—		—	—		—	—		—		—		—			—			(4,810		)	(4,810		)
Series A preferred dividends and dividends payable at $1.50 per share year to date (unaudited)	—	—		—	—		—	—		—		—		(10,575		)	—			—			(10,575		)
Series C preferred dividends and dividends payable at $1.179 per share year to date (unaudited)	—	—		—	—		—	—		—		—		(4,836		)	—			—			(4,836		)
Series D preferred dividends and dividends payable at $1.50 per share year to date (unaudited)	—	—		—	—		—	—		—		—		(6,900		)	—			—			(6,900		)
Net income (unaudited)	—	—		—	—		—	—		—		36,749		—			—			1,694			38,443
Pension liability adjustment (unaudited)	—	—		—	—		—	—		—		—		—			176			—			176
Balance at September 30, 2012 (unaudited)	7,050,000	$	176,250	4,600,000	$	115,000	135,237,438	$	1,352	$	1,492,528	$	147,329	$	(467,707	)	$	(4,740	)	$	56,921		$	1,516,933

See accompanying notes to consolidated financial statements.

3

SUNSTONE HOTEL INVESTORS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Nine Months Ended September 30, 2012			Nine Months Ended September 30, 2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	38,443		$	73,711
Adjustments to reconcile net income to net cash provided by operating activities:
Bad debt expense	22			225
Gain on sales of hotel properties and other assets, net	(38,270		)	(14,039		)
(Gain) loss on extinguishment of debt	191			(18,145		)
Gain on remeasurement of equity interests	—			(69,230		)
Loss on derivatives	595			2,091
Depreciation	95,905			87,578
Amortization of franchise fees and other intangibles	14,835			10,401
Amortization and write-off of deferred financing fees	3,059			2,274
Amortization of loan discounts	791			792
Amortization of deferred stock compensation	2,654			2,170
Impairment loss	—			12,357
Equity in earnings of unconsolidated joint ventures	—			(21		)
Changes in operating assets and liabilities:
Restricted cash	30			12,171
Accounts receivable	5,176			3,098
Inventories	(107		)	(125		)
Prepaid expenses and other assets	(6,778		)	2,470
Accounts payable and other liabilities	10,765			9,962
Accrued payroll and employee benefits	1,275			1,081
Due to Third-Party Managers	(1		)	(991		)
Discontinued operations	681			1,180
Net cash provided by operating activities	129,266			119,010
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of hotel properties and other assets	46,363			40,002
Restricted cash — replacement reserve	(8,922		)	(5,453		)
Acquisitions of hotel properties and other assets	(120,003		)	(263,264		)
Renovations and additions to hotel properties and other real estate	(76,639		)	(82,433		)
Payment for interest rate derivative	—			(133		)
Net cash used in investing activities	(159,201		)	(311,281		)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from preferred stock offering	—			115,000
Payment of preferred stock offering costs	—			(4,062		)
Proceeds from common stock offering	126,533			—
Payment of common stock offering costs	(431		)	—
Proceeds from note payable and credit facility	15,000			240,000
Payments on notes payable and credit facility	(63,539		)	(252,189		)
Payment for repurchase of notes payable and related costs	(4,570		)	—
Payments of deferred financing costs	(1,320		)	(4,818		)
Dividends paid	(22,311		)	(17,584		)
Distributions to non-controlling interest	(4,810		)	(772		)
Net cash provided by financing activities	44,552			75,575
Net increase (decrease) in cash and cash equivalents	14,617			(116,696		)
Cash and cash equivalents, beginning of period	149,852			275,773
Cash and cash equivalents, end of period	$	164,469		$	159,077
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest	$	60,139		$	55,590
NONCASH INVESTING ACTIVITY
Accounts payable related to renovations and additions to hotel properties and other real estate	$	6,347		$	6,853
Amortization of deferred stock compensation — construction activities	$	225		$	313
Amortization of deferred stock compensation — unconsolidated joint venture	$	—		$	2
NONCASH FINANCING ACTIVITY
Issuance of note receivable	$	—		$	90,000
Issuance of common stock in connection with acquisition of hotel property	$	51,160		$	—
Assignment of debt in connection with dispositions of hotel properties	$	(122,622	)	$	—
Assumption of debt in connection with acquisitions of hotel properties	$	—		$	545,952
Dividends payable	$	7,437		$	7,437

See accompanying notes to consolidated financial statements.

4

SUNSTONE HOTEL INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Description of Business

Sunstone Hotel Investors, Inc. (the “Company”) was incorporated in Maryland on June 28, 2004 in anticipation of an initial public offering of common stock, which was consummated on October 26, 2004.  The Company, through its 100% controlling interest in Sunstone Hotel Partnership, LLC (the “Operating Partnership”), of which the Company is the sole managing member, and the subsidiaries of the Operating Partnership, including Sunstone Hotel TRS Lessee, Inc. (the “TRS Lessee”) and its subsidiaries, is currently engaged in acquiring, owning, asset managing and renovating hotel properties. The Company may also sell certain hotel properties from time to time. The Company operates as a real estate investment trust (“REIT”) for federal income tax purposes.

As a REIT, certain tax laws limit the amount of “non-qualifying” income the Company can earn, including income derived directly from the operation of hotels. As a result, the Company leases all of its hotels to its TRS Lessee, which in turn enters into long-term management agreements with third parties to manage the operations of the Company’s hotels. As of September 30, 2012, the Company had interests in 30 hotels (the “30 hotels”) held for investment. The Company’s third-party managers included subsidiaries of Marriott International, Inc. or Marriott Hotel Services, Inc. (collectively, “Marriott”), managers of 10 of the Company’s 30 hotels; a subsidiary of Interstate Hotels & Resorts, Inc., manager of 10 of the Company’s 30 hotels; Highgate Hotels L.P. and an affiliate, manager of three of the Company’s 30 hotels; Davidson Hotels & Resorts and Hilton Worldwide, each a manager of two of the Company’s 30 hotels; and Crestline Hotels & Resorts, Fairmont Hotels & Resorts (U.S.) and Hyatt Corporation, each a manager of one of the Company’s 30 hotels.  In addition, the Company owns 100% of BuyEfficient, LLC (“BuyEfficient”), an electronic purchasing platform that allows members to procure food, operating supplies, furniture, fixtures and equipment, and 100% of a commercial laundry facility located in Rochester, Minnesota.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements as of September 30, 2012 and December 31, 2011, and for the three and nine months ended September 30, 2012 and 2011, include the accounts of the Company, the Operating Partnership, the TRS Lessee and their subsidiaries. All significant intercompany balances and transactions have been eliminated. The Company consolidates subsidiaries when it has the ability to direct the activities that most significantly impact the economic performance of the entity. The Company also evaluates its subsidiaries to determine if they should be considered variable interest entities (“VIEs”). Typically, the entity that has the power to direct the activities that most significantly impact economic performance would consolidate the VIE. The Company considers an entity a VIE if equity investors own an interest therein that does not have the characteristics of a controlling financial interest or if such investors do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. In accordance with the Consolidation Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), the Company reviewed its subsidiaries to determine if (i) they should be considered VIEs, and (ii) whether the Company should change its consolidation determination based on changes in the characteristics of these entities.

Non-controlling interests at both September 30, 2012 and December 31, 2011 represent the outside equity interests in various consolidated affiliates of the Company.

The accompanying interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and in conformity with the rules and regulations of the Securities and Exchange Commission. In the Company’s opinion, the interim financial statements presented herein reflect all adjustments, consisting solely of normal and recurring adjustments, which are necessary to fairly present the interim financial statements. These financial statements should be read in conjunction with the financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, filed with the Securities and Exchange Commission on February 28, 2012.

Certain prior year amounts have been reclassified in the consolidated financial statements in order to conform to the current year presentation.

The Company has evaluated subsequent events through the date of issuance of these financial statements.

5

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

Reporting Periods

The results the Company reports in its consolidated statements of operations and comprehensive income (loss) are based on results reported to the Company by its hotel managers.  These hotel managers use different reporting periods.  Marriott uses a fiscal year ending on the Friday closest to December 31 and reports twelve weeks of operations each for the first three quarters of the year, and sixteen or seventeen weeks of operations for the fourth quarter of the year. The Company’s other hotel managers report operations on a standard monthly calendar.  The Company has elected to adopt quarterly close periods of March 31, June 30 and September 30, and an annual year end of December 31. As a result, the Company’s 2012 results of operations for the Marriott-managed hotels include results from December 31 through March 23 for the first quarter, March 24 through June 15 for the second quarter, June 16 through September 7 for the third quarter, and September 8 through December 28 for the fourth quarter. The Company’s 2011 results of operations for the Marriott-managed hotels include results from January 1 through March 25 for the first quarter, March 26 through June 17 for the second quarter, June 18 through September 9 for the third quarter, and September 10 through December 30 for the fourth quarter. Beginning in 2013, Marriott will report operations on a standard monthly calendar basis.

Fair Value of Financial Instruments

As of September 30, 2012 and December 31, 2011, the carrying amount of certain financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses were representative of their fair values due to the short-term maturity of these instruments.

The Company follows the requirements of the Fair Value Measurements and Disclosure Topic of the FASB ASC, which establishes a framework for measuring fair value and disclosing fair value measurements by establishing a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

Level 1	Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2	Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the asset or the liability; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3	Unobservable inputs reflecting the Company’s own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

As discussed in Note 7, during 2011, the Company entered into interest rate protection agreements to manage or hedge interest rate risks in conjunction with its acquisitions of the outside 62.0% equity interests in the Doubletree Guest Suites Times Square, the JW Marriott New Orleans, a 75.0% majority interest in the entity that owns the Hilton San Diego Bayfront and the refinancing of the debt secured by the Doubletree Guest Suites Times Square. The Company records interest rate protection agreements on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in the consolidated statements of operations and comprehensive income (loss) as they are not designated as hedges. In accordance with the Fair Value Measurements and Disclosure Topic of the FASB ASC, the Company estimates the fair value of its interest rate protection agreements based on quotes obtained from the counterparties, which are based upon the consideration that would be required to terminate the agreements. The Company has valued the derivative interest rate cap agreements related to the Doubletree Guest Suites Times Square and the Hilton San Diego Bayfront using Level 2 measurements as an asset of $20,000 and $0.4 million as of September 30, 2012 and December 31, 2011, respectively. The interest rate cap agreements are included in other assets, net, on the accompanying consolidated balance sheets. The Company has valued the derivative interest rate swap agreement related to the JW Marriott New Orleans using Level 2 measurements as a liability of $1.8 million and $1.6 million as of September 30, 2012 and December 31, 2011, respectively. The interest rate swap agreement is included in other liabilities on the accompanying consolidated balance sheets.

The Company is responsible for paying the premiums, if any, for a $5.0 million split life insurance policy for its former Executive Chairman and Chief Executive Officer, Robert A. Alter. The Company has valued this policy using Level 2 measurements at $1.5 million and $1.9 million as of September 30, 2012 and December 31, 2011, respectively. These amounts are included in other assets, net in the accompanying consolidated balance sheets, and will be used to reimburse the Company for payments made to Mr. Alter associated with a Retirement Benefit Agreement. The Company has valued the Retirement Benefit Agreement using Level 2 measurements at $1.5 million and $1.7 million as of September 30, 2012 and December 31, 2011, respectively. The agreement calls for the balance of the Retirement Benefit Agreement to be paid out to Mr. Alter in 10 annual installments, beginning in 2011. As such, the Company has paid Mr. Alter a total of $0.4 million through September 30, 2012, which was reimbursed to the Company using funds from the split life insurance policy. These amounts are included in accrued payroll and employee benefits in the accompanying consolidated balance sheets.

6

On an annual basis and periodically when indicators of impairment exist, the Company has analyzed the carrying values of its hotel properties and other assets using Level 3 measurements, including a discounted cash flow analysis to estimate the fair value of its hotel properties and other assets taking into account each property’s expected cash flow from operations, holding period and estimated proceeds from the disposition of the property. The factors addressed in determining estimated proceeds from disposition included anticipated operating cash flow in the year of disposition and terminal capitalization rate. The Company did not identify any properties or other assets with indicators of impairment during the nine months ended September 30, 2012. In June 2011, the Company recognized a $1.5 million impairment on its commercial laundry facility located in Salt Lake City, Utah based on proceeds received from its sale in July 2011. In September 2011, the Company recognized a $10.9 million impairment loss on the $90.0 million mortgage-secured purchase money loan received from the buyer of the Royal Palm Miami Beach (the “Royal Palm note”) in anticipation of its sale in October 2011.

On an annual basis and periodically when indicators of impairment exist, the Company also analyzes the carrying value of its goodwill using Level 3 measurements including a discounted cash flow analysis to estimate the fair value of its reporting units. For the three and nine months ended September 30, 2012 and 2011, the Company did not identify any goodwill with indicators of impairment.

As of September 30, 2012 and December 31, 2011, 70.2% and 71.1%, respectively, of the Company’s outstanding debt included in continuing operations had fixed interest rates, including the effect of an interest rate swap agreement. The Company’s carrying value of its debt secured by properties not classified as discontinued operations totaled $1.4 billion as of both September 30, 2012 and December 31, 2011. Using Level 3 measurements, including the Company’s weighted average cost of debt ranging between 5.5% and 6.5% as of September 30, 2012, and between 6.0% and 7.0% as of December 31, 2011, the Company estimates that the fair market value of its debt included in continuing operations totaled $1.4 billion as of both September 30, 2012 and December 31, 2011.

The following table presents the Company’s assets measured at fair value on a recurring and non-recurring basis at September 30, 2012 and December 31, 2011 (in thousands):

			Fair Value Measurements at Reporting Date
	Total		Level 1		Level 2		Level 3
September 30, 2012 (unaudited):
Interest rate cap derivative agreements	$	20	$	—	$	20	$	—
Life insurance policy	1,490		—		1,490		—
Total assets at September 30, 2012	$	1,510	$	—	$	1,510	$	—
December 31, 2011:
Interest rate cap derivative agreements	$	386	$	—	$	386	$	—
Life insurance policy	1,877		—		1,877		—
Total assets at December 31, 2011	$	2,263	$	—	$	2,263	$	—

The following table presents the Company’s liabilities measured at fair value on a recurring and non-recurring basis at September 30, 2012 and December 31, 2011 (in thousands):

			Fair Value Measurements at Reporting Date
	Total		Level 1		Level 2		Level 3
September 30, 2012 (unaudited):
Interest rate swap derivative agreement	$	1,796	$	—	$	1,796	$	—
Retirement benefit agreement	1,490		—		1,490		—
Total liabilities at September 30, 2012	$	3,286	$	—	$	3,286	$	—
December 31, 2011:
Interest rate swap derivative agreement	$	1,567	$	—	$	1,567	$	—
Retirement benefit agreement	1,687		—		1,687		—
Total liabilities at December 31, 2011	$	3,254	$	—	$	3,254	$	—

7

The following table presents the gains and impairment charges included in earnings as a result of applying Level 3 measurements for the three and nine months ended September 30, 2012 and 2011 (in thousands):

	Three Months EndedSeptember 30, 2012		Three Months EndedSeptember 30, 2011			Nine Months EndedSeptember 30, 2012		Nine Months EndedSeptember 30, 2011
	(unaudited)		(unaudited)			(unaudited)		(unaudited)
Gains:
Investment in unconsolidated joint ventures (1)	$	—	$	—		$	—	$	69,230
Impairment charges:
Other assets, net (2)	—		(10,862		)	—		(10,862		)
Other real estate of discontinued operations, net	—		—			—		(1,495		)
Total impairment charges	—		(10,862		)	—		(12,357		)
Total Level 3 measurement charges included in earnings	$	—	$	(10,862	)	$	—	$	56,873

(1)Includes the gains recorded by the Company on the remeasurements of the Company’s equity interests in its Doubletree Guest Suites Times Square and BuyEfficient joint ventures.

(2)Includes the impairment loss recorded by the Company on the Royal Palm note in anticipation of the note’s sale in October 2011.

Accounts Receivable

Accounts receivable primarily represents receivables from hotel guests who occupy hotel rooms and utilize hotel services. Accounts receivable also includes, among other things, receivables from customers who utilize the Company’s commercial laundry facility in Rochester, Minnesota, receivables from customers who utilize purchase volume rebates through BuyEfficient, as well as tenants who lease space in the Company’s hotels. The Company maintains an allowance for doubtful accounts sufficient to cover potential credit losses. The Company’s accounts receivable at both September 30, 2012 and December 31, 2011 includes an allowance for doubtful accounts of $0.2 million.

Acquisitions of Hotel Properties and Other Entities

Accounting for the acquisition of a hotel property or other entity as a purchase transaction requires an allocation of the purchase price to the assets acquired and the liabilities assumed in the transaction at their respective estimated fair values. The most difficult estimations of individual fair values are those involving long-lived assets, such as property, equipment, intangible assets and capital lease obligations that are assumed as part of the acquisition of a leasehold interest. During 2011 and the first nine months of 2012, the Company used all available information to make these fair value determinations, and engaged an independent valuation specialist to assist in the fair value determination of the long-lived assets acquired and the liabilities assumed in the Company’s purchases of the Hyatt Chicago Magnificent Mile, the Hilton Garden Inn Chicago Downtown/Magnificent Mile, the outside 62.0% equity interests in the Doubletree Guest Suites Times Square joint venture, the outside 50.0% equity interests in the BuyEfficient joint venture, the JW Marriott New Orleans and the 75.0% majority interest in the entity that owns the Hilton San Diego Bayfront. Due to the inherent subjectivity in determining the estimated fair value of long-lived assets, the Company believes that the recording of acquired assets and liabilities is a critical accounting policy.

Goodwill

The Company follows the requirements of the Intangibles — Goodwill and Other Topic of the FASB ASC, which states that goodwill and intangible assets deemed to have indefinite lives are subject to annual impairment tests. As a result, the carrying value of goodwill allocated to the hotel properties and other assets is reviewed at least annually for impairment. In addition, when facts and circumstances suggest that the Company’s goodwill may be impaired, an interim evaluation of goodwill is prepared. Such review entails comparing the carrying value of the individual hotel property or other asset (the reporting unit) including the allocated goodwill to the fair value determined for that reporting unit (see Fair Value of Financial Instruments for detail on the Company’s valuation methodology). If the aggregate carrying value of the reporting unit exceeds the fair value, the goodwill of the reporting unit is impaired to the extent of the difference between the fair value and the aggregate carrying value, not to exceed the carrying amount of the allocated goodwill. The Company’s annual impairment evaluation is performed each year as of December 31.

8

During the first quarter ended March 31, 2011, the Company recorded additional goodwill of $8.4 million related to its purchase of the outside 50.0% equity interest in its BuyEfficient joint venture.

Deferred Financing Fees

Deferred financing fees consist of loan fees and other financing costs related to the Company’s outstanding indebtedness and are amortized to interest expense over the terms of the related debt. Upon repayment or refinancing of the underlying debt, any related unamortized deferred financing fee is charged to interest expense. Upon any loan modification, any related unamortized deferred financing fee is amortized over the remaining terms of the modified loan.

During both the three and nine months ended September 30, 2012, the Company incurred and paid deferred financing fees of $1.3 million related to an amendment of its credit facility. During the three and nine months ended September 30, 2011, the Company incurred and paid deferred financing fees of approximately zero and $4.8 million, respectively, related to new debt and debt refinancings. Such costs are being amortized over the related terms of the loans.

In the third quarter of 2012, the Company wrote off $0.2 million in deferred financing fees related to its sales of the Marriott Del Mar in August 2012, and the Doubletree Guest Suites Minneapolis, Hilton Del Mar and Marriott Troy in September 2012. In the second quarter of 2012, the Company wrote off $3,000 in deferred financing fees related to its repayment of the non-recourse mortgage secured by the Renaissance Long Beach.

Total amortization and write off of deferred financing fees for the three and nine months ended September 30, 2012 and 2011 was as follows (in thousands):

	Three Months Ended September 30, 2012		Three Months Ended September 30, 2011		Nine Months Ended September 30, 2012		Nine Months Ended September 30, 2011
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Continuing operations:
Amortization of deferred financing fees	$	929	$	823	$	2,825	$	2,215
Write-off of deferred financing fees	—		—		3		—
Total deferred financing fees — continuing operations	929		823		2,828		2,215
Discontinued operations:
Amortization of deferred financing fees	13		20		46		59
Write-off of deferred financing fees	185		—		185		—
Total deferred financing fees — discontinued operations	198		20		231		59
Total amortization of deferred financing fees	$	1,127	$	843	$	3,059	$	2,274

Earnings Per Share

The Company applies the two-class method when computing its earnings per share as required by the Earnings Per Share Topic of the FASB ASC, which requires the net income per share for each class of stock (common stock and convertible preferred stock) to be calculated assuming 100% of the Company’s net income is distributed as dividends to each class of stock based on their contractual rights. To the extent the Company has undistributed earnings in any calendar quarter, the Company will follow the two-class method of computing earnings per share.

The Company follows the requirements of the Earnings Per Share Topic of the FASB ASC, which states that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. For the three and nine months ended September 30, 2012, $0.4 million and $0.2 million, respectively were allocated to the participating securities. For the three and nine months ended September 30, 2011, zero and $0.6 million, respectively, were allocated to the participating securities.

9

In accordance with the Earnings Per Share Topic of the FASB ASC, basic earnings available (loss attributable) to common stockholders per common share is computed based on the weighted average number of shares of common stock outstanding during each period. Diluted earnings available (loss attributable) to common stockholders per common share is computed based on the weighted average number of shares of common stock outstanding during each period, plus potential common shares considered outstanding during the period, as long as the inclusion of such awards is not anti-dilutive. Potential common shares consist of unvested restricted stock awards, the incremental common shares issuable upon the exercise of stock options and the conversion of the Company’s Series C Cumulative Convertible Redeemable Preferred Stock (“Series C preferred stock”), using the more dilutive of either the two-class method or the treasury stock method.

The following table sets forth the computation of basic and diluted earnings (loss) per common share (in thousands, except per share data):

	Three Months Ended September 30, 2012			Three Months Ended September 30, 2011			Nine Months Ended September 30, 2012			Nine Months Ended September 30, 2011
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Numerator:
Net income (loss)	$	39,556		$	(16,553	)	$	38,443		$	73,711
(Income) loss from consolidated joint venture attributable to non-controlling interest	(827		)	31			(1,694		)	(213		)
Distributions to non-controlling interest	(8		)	(8		)	(24		)	(22		)
Preferred stock dividends	(7,437		)	(7,437		)	(22,311		)	(19,884		)
Undistributed income allocated to unvested restricted stock compensation	(352		)	—			(162		)	(638		)
Numerator for basic and diluted earnings available (loss attributable) to common stockholders	$	30,932		$	(23,967	)	$	14,252		$	52,954
Denominator:
Weighted average basic and diluted common shares outstanding	135,236			117,254			124,271			117,186
Basic and diluted earnings available (loss attributable) to common stockholders per common share	$	0.23		$	(0.20	)	$	0.11		$	0.45

The Company’s shares of Series C preferred stock issuable upon conversion, unvested restricted shares associated with its long-term incentive plan and shares associated with common stock options have been excluded from the above calculation of earnings (loss) per share for the three and nine months ended September 30, 2012 and 2011, as their inclusion would have been anti-dilutive.

Segment Reporting

The Company reports its consolidated financial statements in accordance with the Segment Reporting Topic of the FASB ASC. Currently, the Company operates in one segment, operations held for investment.

3. Investment in Hotel Properties

Investment in hotel properties, net consisted of the following (in thousands):

	September 30, 2012			December 31, 2011
	(unaudited)
Land	$	268,093		$	254,053
Buildings and improvements	2,687,110			2,499,055
Furniture, fixtures and equipment	351,014			319,615
Intangibles	167,467			162,267
Franchise fees	1,326			943
Construction in process	33,033			17,267
	3,508,043			3,253,200
Accumulated depreciation and amortization	(707,361		)	(602,942		)
	$	2,800,682		$	2,650,258

10

In June 2012, the Company purchased the leasehold interest in the 417-room Wyndham Chicago for a contractual purchase price of $88.425 million. The Company funded the acquisition with $29.7 million of cash on hand (including $0.3 million of proration credits) and the issuance of 5,454,164 shares of the Company’s common stock, the “Wyndham stock consideration.” The Wyndham stock consideration was determined by dividing $58.425 million by the product of (1) the closing price of $10.71 on the NYSE of the Company’s common stock on May 2, 2012 and (2) 1.03. In connection with this acquisition, the Company entered into a registration rights agreement requiring the Company to register the Wyndham stock consideration. The Company prepared the registration statement on Form S-3, which was filed with the SEC as required on June 4, 2012. Based on the $9.38 closing price of the Company’s common stock on the NYSE on June 4, 2012, the total purchase price of the Wyndham Chicago hotel for accounting purposes was $81.16 million, excluding proration adjustments and closing costs. Immediately upon acquisition, the Company rebranded the hotel the Hyatt Chicago Magnificent Mile. The Company recorded the acquisition at fair value using an independent third-party analysis, with the purchase price allocated to investment in hotel properties, hotel working capital assets and liabilities, obligations under capital lease and the Company’s common stock. The Company recognized acquisition-related costs of $15,000 and $1.3 million for the three and nine months ended September 30, 2012, respectively, which are included in corporate overhead on the Company’s consolidated statements of operations and comprehensive income (loss). The results of operations for the Hyatt Chicago Magnificent Mile have been included in the Company’s consolidated statements of operations and comprehensive income (loss) from the acquisition date of June 4, 2012 through the third quarter ended September 30, 2012.

In July 2012, the Company purchased the 357-room Hilton Garden Inn Chicago Downtown/Magnificent Mile for a net purchase price of $90.3 million, including $1.45 million of proration credits. The Company recorded the acquisition at fair value using an independent third-party analysis, with the purchase price allocated to investment in hotel properties and hotel working capital assets and liabilities. The Company recognized acquisition-related costs of $0.6 million and $0.7 million for the three and nine months ended September 30, 2012, respectively, and $0.1 million and $0.2 million for the three and nine months ended September 30, 2011, respectively, which are included in corporate overhead on the Company’s consolidated statements of operations and comprehensive income (loss). The results of operations for the Hilton Garden Inn Chicago Downtown/Magnificent Mile have been included in the Company’s consolidated statements of operations and comprehensive income (loss) from the acquisition date of July 19, 2012 through the third quarter ended September 30, 2012.

The fair values of the assets acquired and liabilities assumed at the dates of acquisition for the Hyatt Chicago Magnificent Mile and the Hilton Garden Inn Chicago Downtown/Magnificent Mile were allocated based on independent third-party analyses. The following table summarizes the fair values of assets acquired and liabilities assumed in both of these acquisitions (in thousands):

Assets:
Investment in hotel properties (1)	$	188,745
Cash	32
Accounts receivable	1,190
Other assets	176
Total assets acquired	190,143
Liabilities:
Capital lease obligation (2)	15,579
Other current liabilities	3,369
Total liabilities acquired	18,948
Stockholders’ equity (3)	51,160
Total cash paid for acquisition	$	120,035

(1)Investment in hotel properties was allocated to land ($14.0 million), buildings and improvements ($157.2 million), furniture, fixtures and equipment ($12.1 million), intangibles ($5.2 million) related to advanced bookings, a below-market tenant lease and a below-market management agreement, and franchise fees ($0.2 million) related to a franchise agreement. Details of the intangibles and the franchise agreement are as follows (in thousands):

11

	Value At Acquisition			Expected Life
	(unaudited)
Advanced bookings	$	2,630		6 months to 17.5 months
Below-market tenant lease	(280		)	20 years
Below-market management agreement	2,850			5 years — 10.5 years
Franchise agreement	168			14.5 years
Total intangibles and franchise fees related to 2012 acquisitions	5,368
Accumulated amortization	(1,345		)
	$	4,023

	Amortization Expense
	Three Months Ended September 30, 2012			Three Months Ended September 30, 2011		Nine Months Ended September 30, 2012			Nine Months Ended September 30, 2011
	(unaudited)			(unaudited)		(unaudited)			(unaudited)
Advanced bookings	$	994		$	—	$	1,251		$	—
Below-market tenant lease	(3		)	—		(3		)	—
Below-market management agreement	95			—		95			—
Franchise agreement	2			—		2			—
	$	1,088		$	—	$	1,345		$	—

The Hyatt Chicago Magnificent Mile is subject to a building lease, which the Company determined should be accounted for as a capital lease. Accordingly, at acquisition in June 2012, the Company recorded a capital asset related to its leasehold interest of $58.8 million which has been allocated to buildings and improvements, based upon the estimated fair value of the right to use the leased property for the then remaining term of 85.6 years. The capital asset, net of accumulated depreciation of $0.5 million for the three and nine months ended September 30, 2012 is included in investment in hotel properties, net, in the accompanying consolidated balance sheet as of September 30, 2012.

(2)The Hyatt Chicago Magnificent Mile is subject to a building lease which expires in December 2097 (see Note 14). The Company evaluated the terms of the lease agreement and determined the lease to be a capital lease pursuant to the Leases Topic of the FASB ASC. At acquisition, the fair value of the remaining rent payments of $15.6 million was recorded as a capital lease obligation. The current portion of this obligation is included in accounts payable and accrued expenses, and the long-term portion of this obligation, net of amortization, is included in capital lease obligations, less current portion in the accompanying consolidated balance sheet as of September 30, 2012.

(3)In accordance with the Fair Value Measurements and Disclosure Topic of the FASB ASC, the Wyndham stock consideration was recorded by the Company based on the $9.38 closing price of the Company’s common stock on the NYSE on June 4, 2012.

Acquired properties are included in the Company’s results of operations from the date of acquisition. The following unaudited pro forma results of operations reflect the Company’s results as if the acquisitions of the Hyatt Chicago Magnificent Mile in June 2012, the Hilton Garden Inn Chicago Downtown/Magnificent Mile in July 2012, the Doubletree Guest Suites Times Square in January 2011, the JW Marriott New Orleans in February 2011 and the 75.0% majority interest in the entity that owns the Hilton San Diego Bayfront in April 2011 had occurred on January 1, 2011. In the Company’s opinion, all significant adjustments necessary to reflect the effects of the acquisitions have been made (in thousands, except per share data):

	Three Months Ended September 30, 2012			Three Months Ended September 30, 2011			Nine Months Ended September 30, 2012			Nine Months Ended September 30, 2011
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Revenues	$	221,992		$	209,649		$	661,237		$	621,055
Income available (loss attributable) to common stockholders from continuing operations	$	(61	)	$	(16,077	)	$	(2,348	)	$	44,909
Income (loss) per diluted share available (attributable) to common stockholders from continuing operations	$	(0.06	)	$	(0.20	)	$	(0.21	)	$	0.21

12

For the three and nine months ended September 30, 2012, the Company has included $12.6 million and $15.3 million of revenues, respectively, and net losses of $0.3 million and $1.3 million, respectively in its consolidated statements of operations and comprehensive income (loss) related to the Company’s 2012 acquisitions. For the three and nine months ended September 30, 2011, the Company has included $49.6 million and $111.8 million of revenues, respectively, and net losses of $1.2 million and $4.4 million, respectively, in its consolidated statements of operations and comprehensive income (loss) related to the Company’s 2011 acquisitions.

4. Discontinued Operations

In August 2012, the Company sold the Marriott Del Mar located in San Diego, California for net proceeds of $17.7 million, including the assumption of the existing mortgage secured by the hotel which totaled $47.1 million on the date of sale, and recognized a gain on the sale of $25.5 million. In addition, the Company wrote off $48,000 in deferred financing fees in conjunction with the buyer’s assumption of the debt secured by the hotel. The Company reclassified the hotel’s results of operations for Marriott’s three and nine fiscal periods ended September 7, 2012 and September 9, 2011 to discontinued operations on its consolidated statements of operations and comprehensive income (loss).

In September 2012, the Company sold a portfolio of assets that included the Doubletree Guest Suites Minneapolis, the Hilton Del Mar, the Marriott Troy (located in Minneapolis, Minnesota, San Diego, California, and Troy, Michigan, respectively) and an office building next to the Marriott Troy (the “Portfolio Sale”) for net proceeds of $28.6 million, including the assumptions of three separate mortgages secured by the hotels totaling $75.6 million, as well as a $2.2 million liability for deferred management fees payable to the Marriott Troy’s third-party manager. The Company recognized a gain on the Portfolio Sale of $12.7 million. In addition, the Company wrote off $137,000 in deferred financing fees in conjunction with the buyer’s assumption of the debt secured by the three hotels.  The Company reclassified the results of operations for the Doubletree Guest Suites Minneapolis, the Hilton Del Mar and the office building to discontinued operations for the three and nine months ended September 30, 2012 and 2011 on its consolidated statements of operations and comprehensive income (loss). Since the Marriott Troy is managed by Marriott, the Company reclassified the hotel’s results of operations for the three and nine fiscal periods ended September 7, 2012 and September 9, 2011 to discontinued operations on its consolidated statements of operations and comprehensive income (loss). Due to the fact that the Marriott Troy was sold during Marriott’s tenth fiscal period of the year which the Company includes in October, the Company will include results of operations for the Marriott Troy in its discontinued operations for the three months ended December 31, 2012.

In April 2011, the Company sold the Royal Palm Miami Beach for net proceeds of $129.8 million, including $39.8 million in cash and a $90.0 million note receivable from the buyer of the hotel, and recognized a gain on the sale of $14.0 million. The Company reclassified the hotel’s results of operations for the three and six months ended June 30, 2011, to discontinued operations on its consolidated statements of operations and comprehensive income (loss). The Company retained an earn-out right on the Royal Palm hotel which will enable it to receive future payments of up to $20.0 million in the event the hotel achieves certain performance hurdles.

Prior to its acquisition of the Royal Palm Miami Beach in August 2010, the Company purchased a portion of the hotel’s subordinate debt with a principal amount of $17.1 million for $3.0 million. In conjunction with the purchase of the hotel, the Company received $5.4 million, net of related costs, as a partial payment of this subordinate debt, and recorded a receivable of $3.1 million for additional amounts to be received in 2012 related to this subordinate debt. In addition, the Company recorded a receivable of $0.9 million related to prior owner real estate taxes paid by the Company which were to be reimbursed. During the first quarter of 2012, the Company received a total of $4.2 million from the special servicer, which included the $4.0 million expected payment related to the hotel’s subordinate debt and real estate taxes, along with an additional $0.2 million as reimbursement for certain transaction related invoices. The Company recorded a $0.2 million gain on the sale of the hotel in March 2012 to discontinued operations on its consolidated statements of operations and comprehensive income (loss). Also during the first quarter of 2012, the Company received notice regarding real estate and personal property tax refunds totaling $0.3 million due to the Company relating to its ownership periods during the 2010 and 2011 tax years. The Company has included the $0.3 million in discontinued operations on its consolidated statements of operations and comprehensive income (loss).

13

In June 2011, the Company recorded an $18.1 million gain on extinguishment of debt due to the resolution of all contingencies relating to five hotels which the Company deeded back to the lender in 2010 as part of its 2009 secured debt restructuring program.

In July 2011, the Company sold its commercial laundry facility located in Salt Lake City, Utah for net proceeds of $0.1 million, and recognized a loss on the sale of $0.1 million. In anticipation of this sale, the Company recorded an impairment loss of $1.5 million to discontinued operations in June 2011. The Company reclassified the laundry’s results of operations for the three and nine months ended September 30, 2011 to discontinued operations on its consolidated statements of operations and comprehensive income (loss).

In October 2011, the Company sold the Valley River Inn located in Eugene, Oregon for net proceeds of $16.1 million, including the assumption of the existing mortgage secured by the hotel which totaled $11.5 million on the date of sale, and recognized a gain on the sale of $0.9 million. The Company reclassified the hotel’s results of operations for the three and nine months ended September 30, 2011 to discontinued operations on its consolidated statements of operations and comprehensive income (loss).

The following sets forth the discontinued operations for the three and nine months ended September 30, 2012 and 2011, related to the four hotels and the office building sold in 2012, the two hotels and the commercial laundry facility sold in 2011, as well as the five hotel properties deeded back to the lender during 2010 (in thousands):

	Three Months EndedSeptember 30, 2012			Three Months EndedSeptember 30, 2011			Nine Months EndedSeptember 30, 2012			Nine Months EndedSeptember 30, 2011
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Operating revenues	$	13,412		$	17,637		$	38,848		$	55,794
Operating expenses	(9,131		)	(13,170		)	(28,464		)	(43,210		)
Interest expense	(1,435		)	(1,932		)	(4,894		)	(5,761		)
Depreciation and amortization expense	(977		)	(1,686		)	(4,651		)	(6,767		)
Impairment loss	—			—			—			(1,495		)
Gain on extinguishment of debt	—			—			—			18,145
Gain (loss) on sale of hotels	38,115			(52		)	38,292			13,966
Income from discontinued operations	$	39,984		$	797		$	39,131		$	30,672

5. Other Real Estate

Other real estate, net consisted of the following (in thousands):

	September 30, 2012			December 31, 2011
	(unaudited)
Land	$	1,600		$	1,600
Buildings and improvements	8,193			8,143
Furniture, fixtures and equipment	6,586			5,904
Construction in process	149			62
	16,528			15,709
Accumulated depreciation	(6,861		)	(6,143		)
	9,667			9,566
Land held for investment	188			188
	$	9,855		$	9,754

As of September 30, 2012, other real estate, net included a commercial laundry facility and a vacant parcel of land.

6. Investments in Unconsolidated Joint Ventures

In December 2006, the Company entered into a joint venture agreement to obtain a 38.0% interest in the Doubletree Guest Suites Times Square located in New York City, New York. The Company accounted for its ownership interest in the hotel using the equity method, and its accounting policies were consistent with those of the unconsolidated joint venture. In January 2011, the Company purchased the outside 62.0% equity interests in its Doubletree Guest Suites Times Square joint venture for $37.5 million, and, as a result, became the sole owner of the entity that owns the hotel. In conjunction with this purchase, the Company recognized a gain of $30.1 million on the remeasurement of the Company’s equity interest in this joint venture to its fair market value, and a gain of $30.4 million on the remeasurement of the Company’s investment in a $30.0 million, 8.5% mezzanine loan secured by the hotel which it purchased in April 2010 for $3.45 million to its fair market value. Subsequent to this acquisition, the Company has consolidated the results of operations of the Doubletree Guest Suites Times Square with its continuing operations, and the mezzanine loan was eliminated in consolidation on the Company’s balance sheet until the mezzanine loan was satisfied in conjunction with the Company’s refinancing of the debt secured by the Doubletree Guest Suites Times Square in October 2011.

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In December 2007, the Company entered into a joint venture agreement with Strategic Hotels & Resorts, Inc. (“Strategic”) to own and operate BuyEfficient. Under the terms of the agreement, Strategic acquired a 50.0% interest in BuyEfficient from the Company. The Company accounted for its ownership interest in BuyEfficient using the equity method, and its accounting policies were consistent with those of the unconsolidated joint venture. In January 2011, the Company repurchased Strategic’s 50.0% share in BuyEfficient for $9.0 million. The Company recorded the acquisition at fair value using an independent third-party analysis, with the purchase price allocated to intangibles (which are included in other assets, net on the Company’s consolidated balance sheets as of September 30, 2012 and December 31, 2011), goodwill and other working capital assets and liabilities. In conjunction with this purchase, the Company recognized a gain of $8.7 million on the remeasurement of the Company’s equity interest in this joint venture to its fair market value. Subsequent to this acquisition, the Company is now the sole owner of BuyEfficient, and has consolidated BuyEfficient’s results of operations with its continuing operations.

7. Interest Rate Derivative Agreements

At September 30, 2012, the Company held two interest rate cap agreements and one interest rate swap agreement to manage its exposure to the interest rate risks related to its floating rate debt. The first interest rate cap agreement was purchased in connection with the Company’s acquisition of the 75.0% majority interest in the entity that owns the Hilton San Diego Bayfront. Concurrent with the acquisition, the joint venture replaced the hotel’s $233.8 million construction loan (which was scheduled to mature in April 2011) with a new $240.0 million mortgage secured by the hotel which bears a floating rate of interest of 3-month LIBOR plus 325 basis points. The Company paid $0.1 million for this interest rate cap agreement. The notional amount of the related debt totaled $120.0 million at September 30, 2012. The interest rate cap strike rate is 3.75%, and the maturity date is in April 2013. The second interest rate cap agreement was acquired in connection with the Company’s refinancing of debt secured by the Doubletree Guest Suites Times Square. The Company’s purchase of the outside 62.0% equity interests in its Doubletree Guest Suites Times Square joint venture in January 2011 included the assumption of $270.0 million of non-recourse senior mortgage and mezzanine debt with a blended interest rate of 3-month LIBOR plus 115 basis points, along with an interest rate cap agreement which the Company valued at $0.1 million at the acquisition date. The Company refinanced this debt in October 2011 with a new $180.0 million non-recourse mortgage which matures in October 2018, and bears interest at a floating rate of 3-month LIBOR plus 325 basis points. In conjunction with this refinancing, the Company entered into an interest rate protection agreement which caps the 3-month LIBOR rate on the new mortgage at 4.0% until October 2015. The Company paid $0.9 million for this interest rate cap agreement. The notional amount of the related debt totaled $180.0 million at September 30, 2012.

The interest rate swap agreement was acquired in connection with the Company’s purchase of the JW Marriott New Orleans, which included the assumption of $42.2 million of floating rate debt which was swapped to a fixed rate of 5.45%. The Company valued this interest rate swap agreement at $0.3 million at the acquisition date. The notional amount of the related debt totaled $40.9 million as of September 30, 2012. The interest rate swap agreement caps the LIBOR interest rate on the underlying debt at a total interest rate of 5.45%, and the maturity date is in September 2015.

None of the interest rate derivative agreements qualify for effective hedge accounting treatment. Accordingly, changes in the fair value of the Company’s interest rate derivative agreements resulted in net losses of $0.1 million and $1.1 million for the three months ended September 30, 2012 and 2011, respectively, and $0.6 million and $2.1 million for the nine months ended September 30, 2012 and 2011, respectively. These net losses have been reflected as increases in interest expense for the three and nine months ended September 30, 2012 and 2011. As of September 30, 2012 and December 31, 2011, the fair values of the interest rate cap agreements totaled an asset of $20,000 and $0.4 million, respectively. The interest rate cap agreements are included in other assets, net on the Company’s consolidated balance sheets. The fair value of the interest rate swap agreement was a liability of $1.8 million and $1.6 million as of September 30, 2012 and December 31, 2011, respectively, and is included in other liabilities on the Company’s consolidated balance sheets.

8. Other Assets

Other assets, net consisted of the following (in thousands):

	September 30, 2012		December 31, 2011
	(unaudited)
Property and equipment, net	$	2,560	$	2,318
Intangibles, net	8,027		8,476
Interest rate cap derivative agreements	20		386
Note receivable	261		394
Cash trap receivables	8,078		—
Other receivables	4,620		4,946
Other	2,875		3,383
	$	26,441	$	19,903

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In conjunction with the Company’s third quarter 2012 sales of the Marriott Del Mar, the Hilton Del Mar and the Marriott Troy, the mortgages secured by these hotels were assumed by the buyers of the hotels. These mortgages contain “cash trap” provisions that were triggered in prior years due to the decline in the performance of the three hotels. Once triggered, substantially all of the excess cash flow from operations generated by the three hotels was deposited directly into lockbox accounts and then swept into cash management accounts for the benefit of the lenders. Cash was distributed to the Company only after certain items were paid, including deposits into leasing and maintenance reserve accounts and the payment of debt service, insurance, taxes, operating expenses, and extraordinary capital expenditures and leasing expenses. As of September 30, 2012, a total of $8.1 million of the Company’s cash was held by the lenders of these three hotels. The cash will be returned to the Company once the lenders release the cash to the buyers, which is expected to occur within the near term.

Due to the purchase of the outside 50.0% equity interest in its BuyEfficient joint venture (see Footnote 6), the Company’s other assets, net as of September 30, 2012 and December 31, 2011, include BuyEfficient’s intangible assets totaling $8.0 million and $8.5 million, respectively, net of accumulated amortization related to certain trademarks, customer and supplier relationships and intellectual property related to internally developed software. These intangibles are amortized using the straight-line method over the remaining useful lives of between seven to 20 years. Accumulated amortization totaled $1.0 million and $0.6 million at September 30, 2012 and December 31, 2011, respectively. Amortization expense totaled $0.1 million for both the three months ended September 30, 2012 and 2011, and $0.4 million for both the nine months ended September 30, 2012 and 2011.

In April 2010, the Company paid $250,000 to purchase one-half of a $5.0 million 8.075% subordinate note maturing in November 2010 secured by the 101-room boutique hotel known as Twelve Atlantic Station in Atlanta, Georgia. In November 2010, the Company purchased the remaining half of the Twelve Atlantic Station subordinate note for an additional $250,000. In November 2010, the subordinate note was modified to provide for monthly interest only payments of 3.5%, with the remaining interest due at maturity, and the maturity date was extended to November 2012. As the subordinate note was in default, the borrower was required to bring the subordinate note current. As of September 30, 2012, the subordinate note secured by the Twelve Atlantic Station was not in default, however, the Company will continue to account for the Twelve Atlantic Station loan using the cost recovery method until such time as the expected cash flows from the loan are reasonably probable and estimable. The Company received $45,000 and $0.1 million during the three and nine months ended September 30, 2012, respectively, and $0.1 million during the year ended December 31, 2011, which payments were applied to the subordinate note’s principal balance in accordance with the cost recovery method.

9. Notes Payable

Notes payable consisted of the following (in thousands):

	September 30, 2012			December 31, 2011
	(unaudited)
Notes payable requiring payments of interest and principal, with fixed rates ranging from 4.97% to 9.88%; maturing at dates ranging from June 2013 through May 2021. The notes are collateralized by first deeds of trust on 14 hotel properties and one commercial laundry facility at September 30, 2012, and 15 hotel properties and one commercial laundry facility at December 31, 2011.	$	922,439		$	966,763
Note payable requiring payments of interest and principal, bearing a blended rate of 3-month LIBOR plus 325 basis points; maturing in April 2016. The note is collateralized by a first deed of trust on one hotel property.	235,512			237,806
Note payable requiring payments of interest only through October 2013, and interest and principal thereafter, with a blended interest rate of 3-month LIBOR plus 325 basis points; maturing in October 2018. The note is collateralized by a first deed of trust on one hotel property.	180,000			180,000
Senior Notes, with a fixed interest rate of 4.60%, maturing in July 2027. The notes are guaranteed by the Company and certain of its subsidiaries.	58,000			62,500
	1,395,951			1,447,069
Less: discount on Senior Notes	(270		)	(1,135		)
	1,395,681			1,445,934
Less: current portion	(77,579		)	(51,279		)
	$	1,318,102		$	1,394,655

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In August 2012, the buyer of the Marriott Del Mar assumed the $47.1 million existing mortgage secured by the hotel, and the Company wrote off $48,000 in related deferred financing fees.

In September 2012, the buyer of the properties in the Portfolio Sale assumed $75.6 million in existing mortgages secured by three hotels in the portfolio, and the Company wrote off $137,000 in related deferred financing fees.

In September 2012, the Company amended and restated its $150.0 million senior unsecured revolving credit facility, which was scheduled to mature in November 2013. The pricing on the amended revolving credit facility was reduced and the 1% LIBOR floor was eliminated. The maturity of the credit facility was extended by two years to November 2015 with an option to extend to November 2016. The amended credit facility’s interest rate is based on a pricing grid with a range of 175 to 350 basis points, which represents a reduction from the previous grid that ranged from 325 to 425 basis points over LIBOR depending on the Company’s leverage ratio. The credit facility also includes an accordion option that allows the Company to request additional lender commitments up to a total of $350.0 million. The Company paid $1.3 million in deferred financing fees in conjunction with this amendment, which will be amortized over the term of the amended credit facility.

In April 2012, the Company used existing cash to repay the remaining balance on its $32.2 million non-recourse mortgage secured by the Renaissance Long Beach, which was scheduled to mature in July 2012. The Company wrote off $3,000 in deferred financing fees in connection with the repayment of this debt.

In February 2012, the Company repurchased $4.5 million in aggregate principal amount of the Senior Notes for $4.57 million, including $13,000 in interest, using its existing cash.  After the repurchase, such Senior Notes were cancelled.  The Company wrote off $47,000 in deferred financing fees and $0.1 million of the Senior Notes discount, and recognized a loss of $0.2 million on this early extinguishment of debt.

As of September 30, 2012 and December 31, 2011, the Company has $58.0 million and $62.5 million, respectively, in outstanding Senior Notes, which have a maturity date of July 2027 and a stated interest rate of 4.60%. The Company follows the requirements of the Debt Topic of the FASB ASC which states that the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) be separately accounted for in a manner that reflects an issuer’s non-convertible debt borrowing rate at the time of issuance. As a result, the liability component is recorded at a discount reflecting its below market interest rate. The liability component is subsequently accreted to its par value over its expected life based on a rate of interest that reflects the issuer’s non-convertible debt borrowing rate at the time of issuance, and is reflected in the results of operations as interest expense. Under the guidelines of the Debt Topic of the FASB ASC, the implicit interest rate for the Senior Notes is 6.5% based on the Company’s non-convertible debt borrowing rate at the time of issuance. Interest expense included accretion of the Senior Notes of $0.3 million for both the three months ended September 30, 2012 and 2011, and $0.8 million for both the nine months ended September 30, 2012 and 2011. Interest on the notes is payable semi-annually in arrears on January 15 and July 15 of each year. The notes, subject to specified events and other conditions, are exchangeable into, at the Company’s option, cash, the Company’s common stock, or a combination of cash and the Company’s common stock. The initial exchange rate for each $1,000 principal amount of notes was 28.9855 shares of the Company’s common stock, representing an exchange price of approximately $34.50 per common share. The initial exchange rate was subject to adjustment under certain circumstances, and is currently adjusted to 32.9179 shares of the Company’s common stock for each $1,000 principal amount of notes, representing an exchange price of approximately $30.38 per common share. The Operating Partnership does not have the right to redeem the notes, except to preserve the Company’s REIT status, before January 20, 2013, and may redeem the notes, in whole or in part, thereafter at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus any accrued and unpaid interest. Upon specified change in control events as well as on specified dates, holders of the notes may require the Operating Partnership to repurchase their notes, in whole or in part, for cash equal to 100% of the principal amount of the notes to be repurchased, plus any accrued and unpaid interest. The notes are the senior unsecured obligations of the Operating Partnership. The Company and several of its subsidiaries have guaranteed the Operating Partnership’s obligations under the notes. The notes do not qualify as a derivative or an equity instrument.

In February 2011, the Company purchased the JW Marriott New Orleans for approximately $93.8 million. The acquisition included the assumption of a $42.2 million floating-rate, non-recourse senior mortgage. Interest on the mortgage has been swapped to a fixed rate of 5.45%. The mortgage matures in September 2015, and is subject to a 25-year amortization schedule.

In April 2011, the Company paid $182.8 million to acquire a 75.0% majority interest in the joint venture that owns the Hilton San Diego Bayfront. Concurrent with the acquisition, the joint venture replaced the hotel’s $233.8 million construction loan (which was scheduled to mature in April 2011) with a new $240.0 million mortgage secured by the hotel. The new mortgage bears a floating interest rate of 3-month LIBOR plus 325 basis points, matures in April 2016, and is subject to a 30-year amortization schedule.

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In October 2011, the Company refinanced the $270.0 million non-recourse senior mortgage and mezzanine debt which the Company assumed in connection with its acquisition of the outside 62.0% equity interests in its Doubletree Guest Suites Times Square joint venture in January 2011. The $270.0 million non-recourse senior mortgage and mezzanine debt was scheduled to mature in January 2012, and bore a blended rate of 3-month LIBOR plus 115 basis points. The Company refinanced this debt in October 2011 with a new $180.0 million non-recourse mortgage which matures in October 2018, and bears a floating interest rate of 3-month LIBOR plus 325 basis points. The new mortgage requires payments of interest only for the first 24 months of the term, and is subject to a 30-year amortization schedule. The Company funded the remainder of the repayment of the prior loan with approximately $90.0 million of its unrestricted cash.

Total interest incurred and expensed on the notes payable was as follows (in thousands):

	Three Months Ended September 30, 2012		Three Months Ended September 30, 2011		Nine Months Ended September 30, 2012		Nine Months Ended September 30, 2011
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Interest expense	$	18,417	$	17,841	$	55,095	$	50,351
Loss on derivatives	96		1,087		595		2,091
Accretion of Senior Notes	267		270		791		792
Amortization of deferred financing fees	929		823		2,825		2,215
Write-off of deferred financing fees	—		—		3		—
	$	19,709	$	20,021	$	59,309	$	55,449

10. Other Current Liabilities and Other Liabilities

Other current liabilities consisted of the following (in thousands):

	September 30, 2012		December 31, 2011
	(unaudited)
Property, sales and use taxes payable	$	19,416	$	8,879
Accrued interest	5,052		5,024
Advance deposits	7,635		5,073
Management fees payable	2,122		2,976
Other	3,604		4,027
	$	37,829	$	25,979

In September 2012, the buyer of the properties in the Portfolio Sale assumed the Company’s $2.2 million liability for deferred management fees payable to the Marriott Troy’s third-party manager.

Other liabilities consisted of the following (in thousands):

	September 30, 2012		December 31, 2011
	(unaudited)
Interest rate swap derivative agreement	$	1,796	$	1,567
Deferred revenue	1,210		1,191
Deferred rent	8,767		6,684
Other	3,016		3,181
	$	14,789	$	12,623

11. Series C Cumulative Convertible Redeemable Preferred Stock

In July 2005, the Company sold 4,102,564 shares of Series C preferred stock with a liquidation preference of $24.375 per share to Security Capital Preferred Growth, Incorporated, an investment vehicle advised by Security Capital Research & Management Incorporated, for gross proceeds of $99.0 million, or $24.13 per share, which included a 1% discount to the conversion price/liquidation preference. Other costs of the offering totaled $130,000. The net proceeds were used to partially finance the Company’s acquisition of six Renaissance hotels. As a result of the Company’s stock dividend paid in January 2009, the Series C conversion price was adjusted to $22.23 per share. Each share of Series C preferred stock is convertible into 1.096 shares of the Company’s common stock at the option of the holder, subject to customary antidilution provisions, including stock splits, stock

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dividends, non-cash distributions and above-market issuer self-tender or exchange offers. As of July 8, 2010, the Series C preferred stock is redeemable at the Company’s option, in whole or in part, at any time or from time to time, for cash at a redemption price of $24.375 per share, plus accrued and unpaid dividends up to and including the redemption date. The holders of the Series C preferred stock have the right to require the Company to redeem the Series C preferred stock in the event of any of the following:  (1) a chan