SUNSTONE HOTEL INVESTORS, INC. – 10-K – Management’s Discussion and Analysis of Financial Condition and Results of Operations

Edgar Online, Inc.

The following discussion should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this report.

   Overview    Sunstone Hotel Investors, Inc. is a Maryland corporation. We operate as a self-managed and self-administered real estate investment trust, or REIT. A REIT is a legal entity that directly or indirectly owns real estate assets. REITs generally are not subject to federal income taxes at the corporate level as long as they pay stockholder dividends equivalent to 100% of their taxable income. REITs are required to distribute to stockholders at least 90% of their taxable income. We own, directly or indirectly, 100% of the interests of Sunstone Hotel Partnership, LLC (the "Operating Partnership"), which is the entity that directly or indirectly owns our hotel properties. We also own 100% of the interests of our taxable REIT subsidiary, Sunstone Hotel TRS Lessee, Inc., which leases all of our hotels from the Operating Partnership, and engages third-parties to manage our hotels. In addition, prior to January 21, 2011, we owned 50.0% of BuyEfficient, LLC ("BuyEfficient"), an electronic purchasing platform that allows members to procure food, operating supplies, furniture, fixtures and equipment. In January 2011, we purchased the outside 50.0% equity interest in BuyEfficient, and as a result, we are now the sole owner of BuyEfficient.    We own primarily upper upscale and upscale hotels in the United States. As of December 31, 2011, we had interests in 32 hotels (the "32 hotels"). Of the 32 hotels, we classify 29 as upscale or upper upscale, two as luxury and one as upper midscale as defined by Smith Travel Research, Inc. The majority of our hotels are operated under nationally recognized brands such as Marriott, Hilton, Fairmont, Hyatt and Sheraton, which are among the most respected and widely recognized brands in the lodging industry. While we believe the largest and most stable segment of demand for hotel rooms is represented by travelers who prefer the consistent service and quality associated with nationally recognized brands, we also believe that in certain markets the strongest demand growth may come from travelers who prefer non-branded hotels that focus on highly customized service standards.    We seek to own hotels in urban locations that benefit from significant barriers to entry by competitors. Most of our hotels are considered business, convention, or airport hotels, as opposed to resort, leisure or extended-stay hotels. The hotels comprising our 32 hotel portfolio average 413 rooms in size.    Our mission is to create meaningful value for our stockholders by becoming the premier hotel owner. Our values include transparency, trust, ethical conduct, communication and discipline. As demand for lodging generally fluctuates with the overall economy (we refer to these changes in demand as the lodging cycle), we seek to employ a balanced, cycle-appropriate corporate strategy that encompasses proactive portfolio management, intensive asset management, disciplined external growth and measured balance sheet improvement as detailed below:    †          Proactive Portfolio Management: The leaders of each of our core disciplines function as a portfolio management team.  The portfolio management team's purpose is to strategically maximize the long-term value of our assets by enhancing portfolio quality / scale, optimizing market exposure, and improving effectiveness / efficiency of decision making by developing long-term portfolio objectives, asset specific plans and a comprehensive external growth strategy. The team is responsible for developing portfolio-wide objectives related to brand and operator relationships, asset quality and scale targets, target markets, capital investments, and asset-level capitalization.  The team is also responsible for developing a comprehensive portfolio growth strategy and decision support tools and models.    †          Intensive Asset Management: Through all phases of the lodging cycle, our strategy emphasizes internal growth and value enhancements through proactive asset management, which entails working closely with our third-party hotel operators to develop and implement long-term strategic plans for each hotel designed to enhance revenues, minimize operational expenses and asset risk, maximize the appeal of our hotels to travelers and maximize our return on invested capital. We also focus on improving the appeal and growth potential of our existing hotels through an internally-managed comprehensive hotel renovation program.                                           29 

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    †          Disciplined External Growth: Our acquisitions plan is oriented around investing in institutional-quality hotels which generate returns in excess of our cost of capital. During the recovery and growth phases of the lodging cycle, our strategy emphasizes external growth objectives oriented toward active investment in hotels that are additive to the quality of our portfolio, that have attractive growth potential and that may benefit from our asset management competencies. We endeavor to structure our acquisitions in a way that will not only increase the value of our common shares, but also will advance our other corporate objectives, such as improving our financial flexibility and reducing our leverage. During periods of cyclical decline, our strategy may emphasize opportunistically investing in distressed assets and the repurchase of our equity or debt securities.    †          Measured Balance Sheet Improvement: Our financial objectives include the measured improvement of our credit ratios, improved disclosures, maintenance of appropriate levels of liquidity, and a gradual reduction in our financial leverage. Our financial objectives are integral to our overall corporate strategy, and accordingly we have developed our financial objectives in conjunction with our internal and external growth objectives. The lodging industry is economically sensitive. Therefore, our financial objectives are aimed at reducing the potentially negative impact of combining high operating leverage with high financial leverage, while preserving access to multiple capital sources and minimizing our weighted-average cost of capital. We seek to capitalize our acquisitions in a way that will advance our financial objectives. For example, as reducing our financial leverage is a key objective, we expect to fund our acquisitions with a greater proportion of equity capital than debt capital. During the mature phase of the lodging cycle, our financial objectives may include liquidity improvement, which may be accomplished through selective hotel dispositions.    During 2010 and continuing into 2011, we witnessed improving business and consumer sentiment, which resulted in improved hotel revenues and profits. Accordingly, we believe we are currently in the early stages of a recovery phase of the lodging cycle, during which hotels acquired are likely to benefit from a multi-year recovery in hotel profitability, and are likely to create long-term value in excess of our investment hurdles. Accordingly, we deployed a portion of our excess cash balance during 2011 towards selective acquisitions. These selective acquisitions included: the purchase of the outside 62.0% equity interests in our Doubletree Guest Suites Times Square joint venture for $37.5 million in cash and the assumption of $270.0 million in non-recourse senior mortgage and mezzanine debt; the purchase of the outside 50.0% equity interest in our BuyEfficient joint venture for $9.0 million in cash; the purchase of the JW Marriott New Orleans for approximately $51.6 million in cash and the assumption of $42.2 million in debt; and the purchase of a 75.0% majority interest in a joint venture that owns the Hilton San Diego Bayfront for approximately $182.8 million. Concurrent with the Hilton San Diego Bayfront acquisition, the joint venture entered into a new $240.0 million mortgage financing secured by the hotel. Our acquisition program is aimed at generating attractive risk-adjusted returns on our investment dollars, and therefore we may target lodging assets outside of the typical branded, urban, upper upscale profile represented by our existing portfolio in order to capitalize on opportunities which may arise. We intend to select the brands and operators for our hotels that we believe will lead to the highest returns.    Additionally, the scope of our acquisitions program may include large hotel portfolios or hotel loans. In general, future acquisitions may be funded by our issuance of additional debt or equity securities, including our common and preferred OP units, or by draws on our $150.0 million senior corporate credit facility entered into in November 2010. However, in light of our current financial objectives, we expect to fund any near term acquisitions with a greater proportion of equity capital than debt capital.    We have disposed, and will continue to dispose, of assets that we believe will not offer long-term returns in excess of our cost of capital, or that have a high risk profile relative to their anticipated return expectations. In April 2011, we completed the sale of the Royal Palm Miami Beach for a gross sales price of $130.0 million, including $40.0 million in cash and a $90.0 million mortgage-secured purchase money loan (the "Royal Palm note") to the buyer, and recognized a gain on the sale of $14.0 million. We sold the Royal Palm note in October 2011 and received net proceeds of approximately $79.2 million. In anticipation of this sale, we recorded an impairment loss of $10.9 million in September 2011. We retained an earn-out right on the Royal Palm hotel which will enable the Company to receive future payments of up to $20.0 million in the event that the hotel achieves certain return hurdles.    

In October 2011, we completed the sale of the Valley River Inn located in Eugene, Oregon for a gross sales price of $16.4 million, including the assumption of the existing mortgage secured by the hotel which totaled $11.5 million at the date of sale, and recognized a gain on the sale of $0.9 million.

    In October 2011, we refinanced  of non-recourse senior mortgage and mezzanine debt secured by interests in the Doubletree Guest Suites Times Square, which was scheduled to mature in January 2012, and which bore a blended interest rate of 3-month LIBOR plus 115 basis points, 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, we entered into an interest rate protection agreement which caps the interest rate on the new mortgage at 4.0% until October 2015. We funded the remainder of the repayment of the prior loan with approximately $90.0 million of our unrestricted cash.    As of December 31, 2011, the weighted average term to maturity of our debt is approximately 6 years, and 73.4% of our debt is fixed rate with a weighted average interest rate of 5.5%. The weighted average interest rate on all of our debt, which includes the effect of our interest rate derivative agreements based on the variable rates at December 31, 2011, is 5.0%. As of December 31, 2011, approximately $325.8 million of our total debt matures over the next four years ($32.0 million in 2012, $62.5 million in 2013, assuming we repay our                                           30  --------------------------------------------------------------------------------

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    Operating Partnership's 4.60% exchangeable senior notes (the "Senior Notes") then remaining balance of $62.5 million at the first put date in 2013, none in 2014 and $231.3 million in 2015). In February 2012, we repurchased $4.5 million of our Senior Notes for a price of $4.57 million plus accrued interest of approximately $13,000, leaving approximately $321.3 million of our debt maturing over the next four years. The $321.3 million does not include $22.0 million of scheduled loan amortization payments due in 2012, $24.1 million due in 2013, $30.4 million due in 2014, or $27.9 million due in 2015.    Operating Activities   

Operating Performance Indicators. The following performance indicators are commonly used in the hotel industry:

   †          Occupancy;    †          Average daily room rate, or ADR;   

† Revenue per available room, or RevPAR, which is the product of occupancy and ADR, and does not include food and beverage revenue, or other operating revenue;

    †          Comparable RevPAR, which we define as the RevPAR generated by hotels we owned as of the end of the reporting period, but excluding those hotels that experienced material and prolonged business interruption due to renovations, re-branding or property damage during either the most recent calendar year presented or the calendar year immediately preceding it. For hotels that were not owned for the entirety of the comparison periods, comparable RevPAR is calculated using RevPAR generated during periods of prior ownership. We refer to this subset of our hotels used to calculate comparable RevPAR as our "Comparable Portfolio." Currently our Comparable Portfolio includes all 32 hotels, and includes prior ownership results for the Doubletree Guest Suites Times Square, the JW Marriott New Orleans and the Hilton San Diego Bayfront, as well as operating results for the Renaissance Westchester for all periods presented, including the periods in 2009 and 2010 while it was held in receivership;    †          RevPAR index, which is the quotient of a hotel's RevPAR divided by the average RevPAR of its competitors, multiplied by 100. A RevPAR index in excess of 100 indicates a hotel is achieving higher RevPAR than its competitors. In addition to absolute RevPAR index, we monitor changes in RevPAR index;    

† EBITDA, which is net income (loss) excluding: non-controlling interests; interest expense; provision for income taxes, including income taxes applicable to sale of assets; and depreciation and amortization;

    †          Adjusted EBITDA, which includes EBITDA but excludes: amortization of deferred stock compensation; the impact of any gain or loss from asset sales; impairment charges; and any other identified adjustments;    †          Funds from operations, or FFO, which includes net income (loss), excluding non-controlling interests, gains and losses from sales of property, plus real estate-related depreciation and amortization (excluding amortization of deferred financing costs) and real estate-related impairment losses, and after adjustment for unconsolidated partnerships and joint ventures; and    

† Adjusted FFO, which includes FFO but excludes penalties, written-off deferred financing costs, non-real estate-related impairment losses and any other identified adjustments.

Revenues. Substantially all of our revenues are derived from the operation of our hotels. Specifically, our revenues consist of the following:

   †          Room revenue, which is the product of the number of rooms sold and the ADR;   

† Food and beverage revenue, which is comprised of revenue realized in the hotel food and beverage outlets as well as banquet and catering events; and

    †          Other operating revenue, which includes ancillary hotel revenue and other items primarily driven by occupancy such as telephone, transportation, parking, spa, entertainment and other guest services. Additionally, this category includes, among other things, operating revenue from our commercial laundry facility located in Rochester, Minnesota, BuyEfficient (subsequent to our purchase of the outside 50.0% equity interest in January 2011), and hotel space leased by third parties.                                           31  --------------------------------------------------------------------------------

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Expenses. Our expenses consist of the following:

† Room expense, which is primarily driven by occupancy and, therefore, has a significant correlation with room revenue;

† Food and beverage expense, which is primarily driven by food and beverage sales and banquet and catering bookings and, therefore, has a significant correlation with food and beverage revenue;

    †          Other operating expense, which includes the corresponding expense of other operating revenue, advertising and promotion, repairs and maintenance, utilities, and franchise costs;    †          Property tax, ground lease and insurance expense, which includes the expenses associated with property tax, ground lease and insurance payments, each of which is primarily a fixed expense, but property tax is subject to regular revaluations based on the specific tax regulations and practices of each municipality;    †          Property general and administrative expense, which includes our property-level general and administrative expenses, such as payroll and related costs, professional fees, travel expenses, and management fees;    †          Corporate overhead expense, which includes our corporate-level expenses, such as payroll and related costs, amortization of deferred stock compensation, acquisition and due diligence costs, severance expense, contract and professional fees, bad debt, relocation, entity level state franchise and minimum tax payments, travel expenses and office rent;    †          Depreciation and amortization expense, which includes depreciation on our hotel and commercial laundry facility buildings, improvements, furniture, fixtures and equipment, along with amortization on our franchise fees and intangibles; and    †          Impairment loss, which includes the charges we have recognized to reduce the carrying value of assets on our balance sheets to their fair value and to write-off goodwill in association with our impairment evaluations.    Other Revenue and Expense. Other revenue and expense consists of the following:    †          Equity in net earnings (losses) of unconsolidated joint ventures, which includes our portion of net earnings or losses from our two joint ventures, BuyEfficient and Doubletree Guest Suites Times Square, prior to our acquisitions of the outside interests in both joint ventures in January 2011. Subsequent to these acquisitions, both entities are now presented on a consolidated basis;    †          Interest and other income, which includes interest income we have earned on our restricted and unrestricted cash accounts and the Royal Palm note, as well as any gains or losses we have recognized on sales of assets other than hotels;   

† Interest expense, which includes interest expense incurred on our outstanding debt, accretion of the Senior Notes, amortization of deferred financing fees, any write-offs of deferred financing fees, and any loan penalties and fees incurred on our debt;

    †          Gain on remeasurement of equity interests, which includes the gain we recognized to mark up the equity interests in our BuyEfficient and Doubletree Guest Suites Times Square joint ventures to fair market value upon our purchases of the outside equity interests in these joint ventures, as well as our gain to mark up the mezzanine loan to its fair value in connection with the acquisition of the outside equity interest in the Doubletree Guest Suites Times Square joint venture;   

† Gain on extinguishment of debt, which includes the gain we recognized on the repurchase and cancellation of the Senior Notes;

† Income from consolidated joint venture attributable to non-controlling interest, which includes net income attributable to the outside 25.0% interest in the joint venture that owns the Hilton San Diego Bayfront;

† Distributions to non-controlling interest, which includes preferred dividends earned by investors from an entity that owns the Doubletree Guest Suites Times Square, including related administrative fees;

† Dividends paid on unvested restricted stock compensation, which includes dividends earned on our unvested restricted stock awards;

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    †          Preferred stock dividends and accretion, which includes dividends earned on our 8.0% Series A Cumulative Redeemable Preferred Stock ("Series A preferred stock"), Series C Cumulative Convertible Redeemable Preferred Stock ("Series C preferred stock") and 8.0% Series D Cumulative Redeemable Preferred Stock ("Series D preferred stock"), as well as redemption value accretion on our Series C preferred stock; and   

† Undistributed income allocated to unvested restricted stock compensation, which includes undistributed income allocated to unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) pursuant to the two-class method.

Factors Affecting Our Operating Results. The primary factors affecting our operating results include overall demand for hotel rooms, the pace of new hotel development, or supply, and the relative performance of our operators in increasing revenue and controlling hotel operating expenses.

    †          Demand. The demand for lodging generally fluctuates with the overall economy. In 2010, following a two year cyclical trough, we began to see signs of improving demand trends, and Comparable Portfolio RevPAR increased 5.3% as compared to 2009, with a 210 basis point increase in portfolio occupancy. These improving demand trends continued in 2011, and Comparable Portfolio RevPAR increased 7.2% in 2011 as compared to 2010, with a 260 basis point increase in portfolio occupancy. Consistent with prior trends, we anticipate that lodging demand will continue to improve as the U.S. economy continues to strengthen. Historically, cyclical troughs are followed by extended periods of relatively strong demand, resulting in a cyclical lodging growth phase. While growth is not expected to be uniform, we expect hotel demand to remain strong over the next several quarters as economic growth, employment and business investment are expected to increase.    †          Supply. The addition of new competitive hotels affects the ability of existing hotels to drive RevPAR and profits. The development of new hotels is largely driven by construction costs and expected performance of existing hotels. The recession and credit crisis which occurred in 2008 and 2009, served to restrict credit and tighten lending standards, which resulted in a meaningful curtailment of funding for new hotel construction projects. Moreover, with same-property hotel profitability still below peak levels, new supply in many markets is difficult to justify economically. Accordingly, we believe hotel development will be constrained until operating trends of existing hotels improve to levels where developer return targets can be achieved, and until the construction financing markets recover. Given the one-to-three-year timeline needed to construct a typical hotel that would compete with our hotels, we expect a window of at least two to four years during which hotel supply, as indicated by the number of new hotel openings, will be below historical levels.    †          Revenues and expenses. We believe that marginal improvements in RevPAR index, even in the face of declining revenues, are a good indicator of the relative quality and appeal of our hotels, and our operators' effectiveness in maximizing revenues. Similarly, we also evaluate our operators' effectiveness in minimizing incremental operating expenses in the context of increasing revenues or, conversely, in reducing operating expenses in the context of declining revenues.    With respect to improving RevPAR index, we continue to work with our hotel operators to optimize revenue management initiatives while taking into consideration market demand trends and the pricing strategies of competitor hotels in our markets. We also develop capital investment programs designed to ensure each of our hotels is well renovated and positioned to appeal to groups and individual travelers fitting target guest profiles. Our revenue management initiatives are generally oriented towards maximizing ADR even if the result may be lower occupancy than may be achieved through lower ADR. Increases in RevPAR attributable to increases in ADR may be accompanied by minimal additional expenses, while increases in RevPAR attributable to higher occupancy may result in higher variable expenses such as housekeeping, labor and utilities expense. Thus, increases in RevPAR associated with higher ADR may result in higher hotel EBITDA margins. Increases in RevPAR associated with higher occupancy may result in a more muted hotel EBITDA margin improvement.    With respect to maximizing operating flow through, we continue to work with our operators to identify operational efficiencies designed to reduce expenses while minimally affecting guest experience. Key asset management initiatives include optimizing hotel staffing levels, increasing the efficiency of the hotels, such as installing energy efficient management and inventory control systems, and selectively combining certain food and beverage outlets. Our operational efficiency initiatives may be difficult or take time to implement, as most categories of variable operating expenses, such as utilities and certain labor costs, such as housekeeping, fluctuate with changes in occupancy. Furthermore, our hotels operate with significant fixed costs, such as general and administrative expense, insurance, property taxes, and other expenses associated with owning hotels, over which our operators have little control. We have experienced increases in hourly wages, employee benefits (especially health insurance), utility costs and property insurance, which have negatively affected our operating margins. Moreover, there are limits to how far our operators can reduce expenses without affecting brand standards or the competitiveness of our hotels.                                           33 

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    Operating Results. The following table presents our operating results for our total portfolio for 2011 and 2010, including the amount and percentage change in the results between the two periods. The table presents the results of operations included in the consolidated statements of operations, and includes the 32 hotels (13,208 rooms) as of December 31, 2011 and 29 hotels (11,056 rooms) as of December 31, 2010. Income from discontinued operations for the year ended December 31, 2011 includes the results of operations and other adjustments for the following: Royal Palm Miami Beach, which was sold in April 2011; our commercial laundry facility located in Salt Lake City, Utah, which was sold in July 2011; and the Valley River Inn located in Eugene, Oregon, which was sold in October 2011. Income from discontinued operations for the year ended December 31, 2011 also includes the gain on extinguishment of debt related to the resolution of the contingency for franchise termination fees for the Hilton Huntington, Residence Inn by Marriott Manhattan Beach, Marriott Provo, Courtyard by Marriott San Diego (Old Town), and Marriott Salt Lake City (University Park), which hotels were deeded back to the lender in November 2010 pursuant to our 2009 secured debt restructuring program. Income from discontinued operations for the year ended December 31, 2010 includes the results of operations for the following: Royal Palm Miami Beach, which was sold in April 2011; our commercial laundry facility located in Salt Lake City, Utah, which was sold in July 2011; the Valley River Inn located in Eugene, Oregon, which was sold in October 2011; the eight hotels which secured the non-recourse mortgage with Massachusetts Mutual Life Insurance Company (the "Mass Mutual eight" hotels: Renaissance Atlanta Concourse; Hilton Huntington; Residence Inn by Marriott Manhattan Beach; Marriott Provo; Courtyard by Marriott San Diego (Old Town); Holiday Inn Downtown San Diego; Holiday Inn Express San Diego (Old Town); and Marriott Salt Lake City (University Park)), which were deeded back to the lender in November 2010 pursuant to our 2009 secured debt restructuring program; and the Marriott Ontario Airport, which was sold by the receiver in August 2010 pursuant to our 2009 secured debt restructuring program. Income from discontinued operations for the year ended December 31, 2010 also includes the gain on extinguishment of debt pursuant to our 2009 secured debt restructuring program for the Renaissance Westchester, which was deeded back to the lender and reacquired by us in June 2010, the W San Diego, which was deeded back to the lender in July 2010, and the Marriott Ontario Airport, which was sold by the receiver in August 2010. These amounts can be found in our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.                                           2011             2010           Change $       Change %                                          (dollars in thousands, except statistical data) REVENUES Room                               $     572,289    $     418,943    $     153,346         36.6 % Food and beverage                        196,524          159,365           37,159         23.3 % Other operating                           65,916           46,236           19,680         42.6 % Total revenues                           834,729          624,544          210,185         33.7 % OPERATING EXPENSES Hotel operating                          512,816          394,276          118,540         30.1 % Property general and administrative                            98,642           74,535           24,107         32.3 % Corporate overhead                        25,746           21,971            3,775         17.2 % Depreciation and amortization            127,945           92,374           35,571         38.5 % Impairment loss                           10,862            1,943            8,919        459.0 % Total operating expenses                 776,011          585,099          190,912         32.6 % Operating income                          58,718           39,445           19,273         48.9 % Equity in earnings of unconsolidated joint ventures                 21              555             (534 )      (96.2 )% Interest and other income                  3,118              111            3,007      2,709.0 % Interest expense                         (82,965 )        (70,174 )        (12,791 )      (18.2 )% Gain on remeasurement of equity interests                                 69,230                -           69,230        100.0 % Income (loss) from continuing operations                                48,122          (30,063 )         78,185        260.1 % Income from discontinued operations                                33,177           68,605          (35,428 )      (51.6 )% Net income                                81,299           38,542           42,757        110.9 % Income from consolidated joint venture attributable to non-controlling interest                    (312 )              -             (312 )     (100.0 )% Distributions to non-controlling interest                     (30 )              -              (30 )     (100.0 )% Preferred stock dividends and accretion                                (27,321 )        (20,652 )         (6,669 )      (32.3 )% Undistributed income allocated to unvested restricted stock compensation                                (636 )           (102 )           (534 )     (523.5 )% Income available to common stockholders                       $      53,000    $      17,788    $      35,212        198.0 %                                            34 

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    The following table presents our operating results for our total portfolio for 2010 and 2009, including the amount and percentage change in the results between the two periods. The table presents the results of operations included in the consolidated statements of operations, and includes the 29 hotels (11,056 rooms) as of December 31, 2010 and 2009. Income from discontinued operations for the year ended December 31, 2010 includes the results of operations for the following: Royal Palm Miami Beach, which was sold in April 2011; our commercial laundry facility located in Salt Lake City, Utah, which was sold in July 2011; the Valley River Inn located in Eugene, Oregon, which was sold in October 2011; the "Mass Mutual eight" hotels, which were deeded back to the lender in November 2010 pursuant to our 2009 secured debt restructuring program; and the Marriott Ontario Airport, which was sold by the receiver in August 2010 pursuant to our 2009 secured debt restructuring program. Income from discontinued operations for the year ended December 31, 2010 also includes the gain on extinguishment of debt pursuant to our 2009 secured debt restructuring program for the Renaissance Westchester, which was deeded back to the lender and reacquired by us in June 2010, the W San Diego, which was deeded back to the lender in July 2010, and the Marriott Ontario Airport, which was sold by the receiver in August 2010. Loss from discontinued operations for 2009 includes the results of operations for the following:  our commercial laundry facility located in Salt Lake City, Utah, which was sold in July 2011; the Valley River Inn located in Eugene, Oregon, which was sold in October 2011; Renaissance Westchester which was deeded back to the lender and reacquired by us in June 2010; W San Diego which was deeded back to the lender in July 2010; Marriott Ontario Airport which was sold by the receiver in August 2010; the Mass Mutual eight hotels which were deeded back to the lender in November 2010, Marriott Napa Valley, which was sold in May 2009; Marriott Riverside, which was sold in June 2009; and Hyatt Suites Atlanta Northwest, which was sold in July 2009. These amounts can be found in our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.                                           2010              2009          Change $      Change %                                          (dollars in thousands, except statistical data) REVENUES Room                               $     418,943    $      401,920    $    17,023          4.2 % Food and beverage                        159,365           157,219          2,146          1.4 % Other operating                           46,236            50,173         (3,937 )       (7.8 )% Total revenues                           624,544           609,312         15,232          2.5 % OPERATING EXPENSES Hotel operating                          394,276           385,674          8,602          2.2 % Property general and administrative                            74,535            71,019          3,516          5.0 % Corporate overhead                        21,971            25,227         (3,256 )      (12.9 )% Depreciation and amortization             92,374            92,457            (83 )       (0.1 )% Impairment loss                            1,943            30,852        (28,909 )      (93.7 )% Total operating expenses                 585,099           605,229        (20,130 )       (3.3 )% Operating income                          39,445             4,083         35,362        866.1 % Equity in net earnings (losses) of unconsolidated joint ventures                                     555           (27,801 )       28,356        102.0 % Interest and other income                    111             1,388         (1,277 )      (92.0 )% Interest expense                         (70,174 )         (75,869 )        5,695          7.5 % Gain on extinguishment of debt                 -            54,506        (54,506 )     (100.0 )% Loss from continuing operations          (30,063 )         (43,693 )       13,630         31.2 % Income (loss) from discontinued operations                                68,605          (225,915 )      294,520        130.4 % Net income (loss)                         38,542          (269,608 )      308,150        114.3 % Dividends paid on unvested restricted stock compensation                  -              (447 )          447        100.0 % Preferred stock dividends and accretion                                (20,652 )         (20,749 )           97          0.5 % Undistributed income allocated to unvested restricted stock compensation                                (102 )               -           (102 )     (100.0 )% Income available (loss attributable) to common stockholders                       $      17,788    $     (290,804 )  $   308,592        106.1 %                                            35 

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    Operating Statistics. Included in the following tables are comparisons of the key operating metrics for our 32 hotel Comparable Portfolio, which includes prior ownership results for the Doubletree Guest Suites Times Square, the JW Marriott New Orleans and the Hilton San Diego Bayfront, as well as operating results for the Renaissance Westchester during the periods in 2009 and 2010 while it was held in receivership.                   2011                         2010                     Change 

Occ% ADR RevPAR Occ% ADR RevPAR Occ% ADR

RevPAR

    74.3 % $ 166.77   $ 123.91   71.7 % $ 161.15   $ 115.54    260 bps 3.5 %    7.2 %                    2010                          2009                    

Change

Occ% ADR RevPAR Occ% ADR RevPAR Occ% ADR

RevPAR

    71.7 % $ 161.15    $ 115.54   69.6 % $ 157.58   $ 109.68    210 bps 2.3 %    5.3 %     Non-GAAP Financial Measures. The following table reconciles net income (loss) to EBITDA and Adjusted EBITDA for our hotel portfolio for the years ended December 31, 2011, 2010 and 2009. We believe EBITDA and Adjusted EBITDA are useful to investors in evaluating our operating performance because these measures help investors evaluate and compare the results of our operations from period to period by removing the impact of our capital structure (primarily interest expense) and our asset base (primarily depreciation and amortization) from our operating results. We also use EBITDA and Adjusted EBITDA as measures in determining the value of hotel acquisitions and dispositions. We caution investors that amounts presented in accordance with our definitions of EBITDA and Adjusted EBITDA may not be comparable to similar measures disclosed by other companies, because not all companies calculate these non-GAAP measures in the same manner. EBITDA and Adjusted EBITDA should not be considered as an alternative measure of our net income (loss), operating performance, cash flow or liquidity. EBITDA and Adjusted EBITDA may include funds that may not be available for our discretionary use to fund interest expense, capital expenditures or general corporate purposes. Although we believe that EBITDA and Adjusted EBITDA can enhance an investor's understanding of our results of operations, these non-GAAP financial measures, when viewed individually, are not necessarily a better indicator of any trend as compared to GAAP measures such as net income (loss) or cash flow from operations. In addition, you should be aware that adverse economic and market conditions may harm our cash flow.                                                  2011            2010            2009 Net income (loss)                         $     81,299    $     38,542    $   (269,608 ) Operations held for investment: Depreciation and amortization                  127,945          92,374      

92,457

 Amortization of lease intangibles                4,007             281      

-

 Interest expense                                75,995          64,813      

71,282

 Interest expense - default rate                      -             884      

472

 Amortization of deferred financing fees                                             3,232           1,585      

1,811

 Write-off of deferred financing fees                21           1,585      

284

 Loan penalties and fees                              -             311      

207

 Non-cash interest related to discount on Senior Notes                                  1,062             996      

1,813

 Non-cash interest related to loss on derivatives                                      2,655               -      

-

 Non-controlling interests: Income from consolidated joint venture attributable to non-controlling interest                                          (312 )             -               - Depreciation and amortization                   (4,014 )             -               - Interest expense                                (1,562 )             -               - Amortization of deferred financing fees                                              (160 )             -      

-

 Non-cash interest related to loss on derivative                                         (31 )             -      

-

 Unconsolidated joint ventures: Depreciation and amortization                        3              52      

5,131

 Interest expense                                     -               -      

2,614

 Amortization of deferred financing fees                                                 -               -             192 Discontinued operations: Depreciation and amortization                    1,951           8,558          18,603 Interest expense                                   515           9,283          17,599 Interest expense - default rate                      -           7,071      

1,407

 Amortization of deferred financing fees                                                10             453      

578

 Write-off of deferred financing fees                42               -               - Loan penalties and fees                              -           1,021           3,784 EBITDA                                         292,658         227,809         (51,374 )  Operations held for investment: Amortization of deferred stock compensation                                     2,745           3,942      

4,055

 Non-cash straightline lease expense              2,398             944      

796

 (Gain) loss on sale of assets                      (83 )           382            (375 ) Gain on remeasurement of equity interests                                      (69,230 )             -      

-

 Gain on extinguishment of debt                       -               -         (54,506 ) Closing costs - completed acquisitions           3,403               -      

-

 Due diligence costs - abandoned project                                              -             959               - Impairment loss                                 10,862           1,943          30,852 Lawsuit settlement costs                         1,620               -               - Costs associated with CEO severance                  -           2,242      

-

 Bad debt expense on corporate note receivable                                           -               -      

5,557

 Non-controlling interests: Non-cash straightline lease expense               (354 )             -      

-

 Unconsolidated joint ventures: Amortization of deferred stock compensation                                         2              32              47 Impairment loss                                      -               -          26,007 Discontinued operations: (Gain) loss on sale of assets                  (14,912 )             -      

13,052

 Impairment loss                                  1,495               -      

195,293

 Gain on extinguishment of debt                 (18,145 )       (86,235 )    

-

 Closing costs - completed acquisition                -           6,796               -                                                (80,199 )       (68,995 )       220,778 Adjusted EBITDA                           $    212,459    $    158,814    $    169,404                                            36 

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    Adjusted EBITDA was $212.5 million in 2011 as compared to $158.8 million in 2010 and $169.4 million in 2009. Adjusted EBITDA increased in 2011 as compared to 2010 due to additional earnings generated by the three hotels we acquired or purchased interests in during 2011 (Doubletree Guest Suites Times Square, JW Marriott New Orleans and Hilton San Diego Bayfront) and by the Renaissance Westchester, which we reacquired from a court-appointed receiver in June 2010, combined with increased earnings at our other hotels. Adjusted EBITDA decreased in 2010 as compared to 2009 primarily due to decreased operating income from discontinued operations combined with increased costs incurred during 2010 to transition our hotels to new management companies.    The following table reconciles net income (loss) to FFO and Adjusted FFO for our hotel portfolio for the years ended December 31, 2011, 2010 and 2009. We believe that the presentation of FFO and Adjusted FFO provides useful information to investors regarding our operating performance because they are measures of our operations without regard to specified non-cash items such as real estate depreciation and amortization, any real estate impairment loss, gain or loss on sale of assets and certain other items which we believe are not indicative of the performance of our underlying hotel properties. We believe that these items are more representative of our asset base and our acquisition and disposition activities than our ongoing operations. We also use FFO as one measure in determining our results after taking into account the impact of our capital structure. We caution investors that amounts presented in accordance with our definitions of FFO and Adjusted FFO may not be comparable to similar measures disclosed by other companies, because not all companies calculate these non-GAAP measures in the same manner. FFO and Adjusted FFO should not be considered as an alternative measure of our net income (loss), operating performance, cash flow or liquidity. FFO and Adjusted FFO may include funds that may not be available for our discretionary use to fund interest expense, capital expenditures or general corporate purposes. Although we believe that FFO and Adjusted FFO can enhance an investor's understanding of our results of operations, these non-GAAP financial measures, when viewed individually, are not necessarily a better indicator of any trend as compared to GAAP measures such as net income (loss) or cash flow from operations. In addition, you should be aware that adverse economic and market conditions may harm our cash flow.                                                  2011            2010            2009 Net income (loss)                         $     81,299    $     38,542    $   (269,608 ) Preferred stock dividends                      (27,321 )       (20,652 )       (20,749 ) Operations held for investment: Real estate depreciation and amortization                                   126,776          91,824          91,910 Real estate impairment loss                          -           1,943          30,852 Amortization of lease intangibles                4,007             281      

-

 (Gain) loss on sale of other assets                (83 )           382            (375 ) Non-controlling interests: Income from consolidated joint venture attributable to non-controlling interest                                          (312 )             -               - Real estate depreciation and amortization                                    (4,014 )             -               - Unconsolidated joint ventures: Real estate depreciation and amortization                                         -               -      

5,060

 Real estate impairment loss                          -               -      

26,007

 Discontinued operations: Real estate depreciation and amortization                                     1,951           8,558      

18,603

 Real estate impairment loss                          -               -      

195,293

 (Gain) loss on sale of assets                  (14,912 )             -      

13,052

 FFO                                            167,391         120,878      

90,045

  Operations held for investment: Interest expense - default rate                      -             884      

472

 Write-off of deferred financing fees                21           1,585      

284

 Loan penalties and fees                              -             311      

207

 Non-cash straightline lease expense              2,398             944      

796

 Non-cash interest related to loss on derivatives                                      2,655               -      

-

 Gain on remeasurement of equity interests                                      (69,230 )             -      

-

 Gain on extinguishment of debt                       -               -         (54,506 ) Closing costs - completed acquisitions           3,403               -      

-

 Due diligence costs - abandoned project                                              -             959               - Impairment loss                                 10,862               -               - Lawsuit settlement costs                         1,620               -               - Costs associated with CEO severance                  -           2,242      

-

 Amortization of deferred stock compensation associated with CEO severance                                            -           1,074      

-

 Bad debt expense on corporate note receivable                                           -               -      

5,557

 Non-controlling interests: Non-cash straightline lease expense               (354 )             -      

-

 Non-cash interest related to loss on derivative                                         (31 )             -      

-

 Discontinued operations: Write-off of deferred financing fees                42               -      

-

 Interest expense - default rate                      -           7,071           1,407 Loan penalties and fees                              -           1,021           3,784 Impairment loss                                  1,495               -               - Gain on extinguishment of debt                 (18,145 )       (86,235 )    

-

 Closing costs - completed acquisition                -           6,796               -                                                (65,264 )       (63,348 )       (41,999 ) Adjusted FFO                              $    102,127    $     57,530    $     48,046                                            37 

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    Adjusted FFO was $102.1 million in 2011 as compared to $57.5 million in 2010 and $48.0 million in 2009. Adjusted FFO increased in 2011 as compared to 2010 due to additional earnings generated by the three hotels we acquired or purchased interests in during 2011 (Doubletree Guest Suites Times Square, JW Marriott New Orleans and Hilton San Diego Bayfront) and by the Renaissance Westchester, which we reacquired from a court-appointed receiver in June 2010, combined with increased earnings at our other hotels. Adjusted FFO increased in 2010 as compared to 2009 primarily due to lower interest expense, partially offset by decreased operating income from discontinued operations combined with increased costs incurred during 2010 to transition our hotels to new management companies.    Room revenue. Room revenue increased $153.3 million, or 36.6%, for the year ended December 31, 2011 as compared to the year ended December 31, 2010. We reacquired the Renaissance Westchester from a court-appointed receiver in June 2010. In addition, we acquired the outside 62.0% equity interests in the Doubletree Guest Suites Times Square in January 2011 (resulting in our 100% ownership of the hotel) and the JW Marriott New Orleans in February 2011. We also purchased a 75.0% majority interest in the joint venture that owns the Hilton San Diego Bayfront in April 2011. These four recently acquired hotels (the "four recently acquired hotels") generated room revenue of $127.1 million during the year ended December 31, 2011. Room revenue generated by the 28 hotels we acquired prior to January 1, 2010 (our "2011 existing portfolio") increased $26.2 million during 2011 as compared to 2010 due to an increase in occupancy ($14.3 million) combined with an increase in ADR ($11.9 million). Room revenue at some of our northeast hotels was negatively impacted during the third quarter of 2011 by Hurricane Irene, which caused a loss in room revenue of approximately $0.3 million at the four recently acquired hotels and approximately $0.6 million in our existing portfolio.    Room revenue increased $17.0 million, or 4.2%, for the year ended December 31, 2010 as compared to the year ended December 31, 2009. The results of operations for the Renaissance Westchester are included in continuing operations from the date we reacquired the hotel (June 2010) forward. The 2009 results of operations for the Renaissance Westchester are included in discontinued operations as possession and control of the hotel was held by a court-appointed receiver. Room revenue generated by the Renaissance Westchester and included in continuing operations for 2010 was $6.3 million. Room revenue generated by the 28 hotels we acquired prior to January 1, 2009 (our "2010 existing portfolio") increased $10.7 million in 2010 as compared to 2009 due to an increase in occupancy ($5.2 million) combined with an increase in ADR ($5.5 million).    Food and beverage revenue. Food and beverage revenue increased $37.2 million, or 23.3%, for the year ended December 31, 2011 as compared to the year ended December 31, 2010. Our four recently acquired hotels contributed $38.2 million to food and beverage revenue during 2011. Food and beverage revenue in our 2011 existing portfolio decreased $1.0 million during 2011 as compared to 2010. This decrease is primarily due to a reduction in business at one of our Houston, Texas hotels with a customer who was operating under a contract with the United States government. In addition, our 2011 existing portfolio lost approximately $0.1 million during the third quarter 2011 due to Hurricane Irene. Banquet revenue also decreased in our 2011 existing portfolio during 2011 as compared to 2010 as a few of our larger group-oriented hotels experienced higher traffic from transient demand than from  group demand. These decreases were slightly offset by an increase in food and beverage revenue generated by our outlets due to increased transient occupancy at several of our hotels, as well as to increased volume from local businesses and residents at several of our recently renovated restaurants and lounges.                                           38  --------------------------------------------------------------------------------

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    Food and beverage revenue increased $2.1 million, or 1.4%, for the year ended December 31, 2010 as compared to the year ended December 31, 2009. Food and beverage revenue generated by the Renaissance Westchester and included in continuing operations for 2010 was $3.4 million. Food and beverage revenue generated from our 2010 existing portfolio decreased $1.3 million in 2010 as compared to 2009. This decrease is primarily due to lower revenues generated in 2010 by our Washington D.C. area hotels, which benefited from the 2009 presidential inauguration. Food and beverage revenue also decreased in 2010 as compared to 2009 due to a reduction in business at our Houston, Texas hotels with one customer who was operating under a contract with the United States government. Additionally, many of our hotels began to consolidate food and beverage outlets during 2009 in order to maximize profitability, which continued into 2010.    Other operating revenue. Other operating revenue increased $19.7 million, or 42.6%, for the year ended December 31, 2011 as compared to the year ended December 31, 2010. Our four recently acquired hotels contributed $12.8 million to other operating revenue during 2011. Other operating revenue also increased $5.4 million in 2011 as compared to 2010 due to the consolidation of BuyEfficient with our operations due to the purchase of the outside 50.0% equity interest in the joint venture in January 2011. Previously, our 50.0% portion of BuyEfficient's net income was included in equity in earnings of unconsolidated joint ventures. Other operating revenue in our 2011 existing portfolio increased $1.5 million in 2011 as compared to 2010, as increased revenue at our commercial laundry facility combined with increased parking and lease rent revenue was slightly offset by decreased telephone, cancellation, attrition, guest movies, lift ticket, spa and retail revenue.    Other operating revenue decreased $3.9 million, or 7.8%, for the year ended December 31, 2010 as compared to the year ended December 31, 2009. Other operating revenue generated by the Renaissance Westchester and included in continuing operations for 2010 was $0.3 million. Other operating revenue generated by our 2010 existing portfolio decreased $4.2 million in 2010 compared to 2009. A substantial portion of our other operating revenue in 2009 resulted from a performance guaranty provided by the manager of the Fairmont Newport Beach. We recognized $2.5 million of the $6.0 million performance guaranty during 2009, and zero during 2010. As of December 31, 2009, we had fully utilized the entire $6.0 million performance guaranty. Other operating revenue in our 2010 existing portfolio also decreased in 2010 as compared to 2009 due to decreased cancellation, attrition, telephone and guest movie revenue, slightly offset by increased parking and spa revenue combined with increased revenue at our commercial laundry facility.    Hotel operating expenses. Hotel operating expenses increased $118.5 million, or 30.1%, during the year ended December 31, 2011 as compared to the year ended December 31, 2010. The four recently acquired hotels contributed $109.3 million to hotel operating expenses during 2011. Hotel operating expenses in our 2011 existing portfolio increased $9.2 million during 2011 as compared to 2010. This increase in hotel operating expenses is primarily related to increased room expense, corresponding to the increased room revenue. In addition, hotel operating expenses in our 2011 existing portfolio increased in 2011 as compared to 2010 due to increases in the following expenses: advertising and repairs and maintenance as the hotels increased spending due to the improved economy; franchise fees and assessments due to the increased revenue; and property taxes due to increased assessments. These increases were partially offset by decreased food and beverage expense, corresponding to the decrease in food and beverage revenue, as well as by decreased utilities due to reductions in gas rates and usage at several of our hotels and by decreased property and liability insurance due to an actuarial adjustment.    Hotel operating expenses increased $8.6 million, or 2.2%, for the year ended December 31, 2010 as compared to the year ended December 31, 2009. Hotel operating expenses generated by the Renaissance Westchester and included in continuing operations for 2010 totaled $7.5 million. Hotel operating expenses for our 2010 existing portfolio increased $1.1 million during 2010 as compared to 2009. This increase in hotel operating expenses is primarily related to the increase in related room revenue. In addition, hotel operating expenses increased in 2010 as compared to 2009 due to costs incurred of $0.2 million during 2010 related to our management company transitions, increased franchise fees and assessments due to higher revenue, and increased ground lease expense due to higher costs at several of our hotels. These increases were partially offset by decreases in the following expenses: food and beverage expense and other operating expenses due to the decline in related revenue; departmental payroll due to staff reductions and cost cutting initiatives implemented throughout 2009; repairs and maintenance as the hotels continued to cancel or delay unnecessary expenditures; utilities due to reductions in gas rates and usage at several of our hotels; and property taxes due to reassessments on several of our hotels.    Property general and administrative expense. Property general and administrative expense increased $24.1 million, or 32.3%, during the year ended December 31, 2011 as compared to the year ended December 31, 2010. The four recently acquired hotels contributed $16.8 million to property general and administrative expense during 2011. Property general and administrative expense also increased $3.7 million in 2011 as compared to 2010 due to the consolidation of BuyEfficient with our operations due to the purchase of the outside 50.0% equity interest in the joint venture in January 2011. Property general and administrative expense in our                                           39 

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    2011 existing portfolio increased $3.6 million during the year ended December 31, 2011 as compared to the year ended December 31, 2010, primarily due to increased payroll, management fees and credit and collection expenses due to the increase in revenue, combined with increased legal expenses, travel, training and sales tax expense, partially offset by decreased contract and professional fees, employee recruitment expenses and computer hardware/software costs.    Property general and administrative expense increased $3.5 million, or 5.0%, for the year ended December 31, 2010 as compared to the year ended December 31, 2009. Property general and administrative expense generated by the Renaissance Westchester and included in continuing operations for 2010 totaled $1.5 million. Hotel operating expenses for our 2010 existing portfolio increased $2.0 million during 2010 as compared to 2009. Management fees and credit and collection expenses increased in our 2010 existing portfolio due to the increase in revenue. In addition, property general and administrative expense in our 2010 existing portfolio increased due to increased payroll, employee recruitment, relocation and training. These increases were partially offset by decreased legal and sales tax audit expenses.    Corporate overhead expense. Corporate overhead expense increased $3.8 million, or 17.2%, during the year ended December 31, 2011 as compared to the year ended December 31, 2010, primarily due to increases of $0.4 million related to payroll and related costs, $0.5 million related to contract and professional fees, $0.2 million related to relocation, $0.2 million related to travel, $0.1 million related to bad debt, $1.1 million related to legal expenses and $2.4 million related to due diligence costs. In September 2011, we accrued $1.6 million in settlement costs related to litigation involving three separate claims by certain employees at four of our hotels: Marriott Del Mar; Marriott Quincy; Renaissance Los Angeles Airport; and Renaissance Long Beach. The Company and certain other defendants reached tentative settlements regarding two of the lawsuits comprising approximately $0.9 million of our third quarter 2011 accrual, which settlements are subject to final approval by the Superior Court of California, Los Angeles County and the Superior Court of California, Orange County. We are still in negotiations regarding the third claim, however we expect to incur a maximum of $0.7 million in related settlement or judgment costs and expenses. During 2011 we incurred due diligence costs of $3.4 million related to our completed acquisitions, and an additional $0.3 million related to in process or abandoned projects. During 2010, we incurred due diligence costs of $1.3 million related to in process or abandoned projects. These increases in corporate overhead expense in 2011 as compared to 2010 were partially offset by a decrease of $1.1 million related to deferred stock compensation.    Corporate overhead expense decreased $3.3 million, or 12.9%, during the year ended December 31, 2010 as compared to the year ended December 31, 2009, primarily due to a decrease in bad debt expense. In December 2009, we determined that a $5.6 million note received from the buyer of 13 hotels we sold in 2006, along with the related interest accrued on the note may be uncollectible. As such, we recorded bad debt expense of $5.6 million to corporate overhead in 2009 to reserve against both the discounted note and the related interest receivable. Corporate overhead expenses also decreased in 2010 as compared to 2009 due to decreased sales tax expense, office rent, and relocation expense. These decreases were partially offset by increases in 2010 related to $3.3 million in CEO severance expenses, $0.5 million in retention bonuses accrued during 2010 to incentivize certain hotel-level employees to stay through the management company transitions, and an increase of $1.1 million in due diligence costs incurred in 2010 as compared to 2009 related to acquisition projects that were abandoned. In addition, corporate overhead expense increased in 2010 as compared to 2009 due to increased legal expenses.    Depreciation and amortization expense. Depreciation and amortization increased $35.6 million, or 38.5%, for the year ended December 31, 2011 as compared to the year ended December 31, 2010. Our four recently acquired hotels contributed $31.0 million to depreciation and amortization during 2011. Depreciation and amortization expense in our 2011 existing portfolio increased $4.6 million during 2011 as compared to 2010 due to additional depreciation recognized on hotel renovations and purchases of furniture, fixtures and equipment ("FF&E") for our hotel properties.    Depreciation and amortization expense decreased $0.1 million, or 0.1%, for the year ended December 31, 2010 as compared to the year ended December 31, 2009. Depreciation and amortization expense generated by the Renaissance Westchester and included in continuing operations for 2010 totaled $0.6 million. Depreciation and amortization in our 2010 existing portfolio decreased $0.7 million during 2010 as compared to 2009 primarily due to the fact that we reduced the depreciable assets of our 2010 existing portfolio by $25.4 million during the second quarter of 2009, as well as due to reduced renovations and purchases of FF&E for our hotel properties.    Impairment loss. Impairment loss totaled $10.9 million for the year ended December 31, 2011, $1.9 million for the year ended December 31, 2010, and $30.9 million for the year ended December 31, 2009. During 2011, we recognized an impairment loss of $10.9 million on our Royal Palm note in anticipation of its sale in October 2011. During 2010, we recognized an impairment loss of $1.9 million on an office building and land adjacent to one of our hotels in anticipation of its possible sale. In conjunction with our quarterly impairment evaluations performed during 2009, we recognized a $25.4 million impairment loss on the Marriott Del Mar to reduce the carrying value of this hotel to its fair value. In addition, during 2009 we recognized a $1.4 million impairment loss related to costs associated with a potential timeshare development, and recognized a $0.1 million impairment loss on a parcel of land adjacent to one of our hotels which we sold in June 2009. We also wrote off $1.3 million of goodwill associated with the Marriott Park City and $2.6 million of goodwill associated with the Marriott Rochester.                                           40  --------------------------------------------------------------------------------

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    Equity in net earnings (losses) of unconsolidated joint ventures. Equity in net earnings (losses) of unconsolidated joint ventures totaled earnings of $21,000 for the year ended December 31, 2011, earnings of $0.6 million for the year ended December 31, 2010, and a net loss of $27.8 million for the year ended December 31, 2009. In January 2011, we acquired 100% interests in both the Doubletree Guest Suites Times Square and BuyEfficient joint ventures. Post-acquisition, therefore, we present both of these investments on a consolidated basis. Prior to our January 14, 2011 acquisition date, we did not recognize any earnings on our Doubletree Guest Suites Times Square joint venture because the joint venture had cumulative losses in excess of our investment, and we reduced our interest in this partnership to zero at December 31, 2009. The excess cumulative losses resulted primarily from the hotel's fourth quarter 2009 impairment charge. Prior to our purchase of the outside 50.0% equity interest in the BuyEfficient joint venture on January 21, 2011, we recognized income of $21,000 on our BuyEfficient joint venture. In 2010, we recognized income of $0.6 million on our BuyEfficient joint venture, and zero on our Doubletree Guest Suites Times Square joint venture because the joint venture had cumulative losses in excess of our investment, and we reduced our interest in this partnership to zero at December 31, 2009. In 2009, we recognized a $28.3 million loss on our Doubletree Guest Suites Times Square joint venture. This $28.3 million loss was comprised of a $2.3 million operating loss and a $26.0 million impairment loss. Also during 2009, we recognized income of $0.5 million on our BuyEfficient joint venture.    Interest and other income. Interest and other income totaled $3.1 million for the year ended December 31, 2011, $0.1 million for the year ended December 31, 2010 and $1.4 million for the year ended December 31, 2009. In 2011, we recognized $2.9 million in interest income, including $2.7 million related to the Royal Palm note. We sold this Royal Palm note in October 2011 for net proceeds of approximately $79.2 million. In anticipation of this sale, we recorded an impairment loss of $10.9 million in September 2011. In addition, during 2011, we recognized income of $0.1 million on sales and dispositions of surplus FF&E located in several of our hotels and $0.1 million in other miscellaneous income. In 2010, we recognized $0.3 million in interest income and $0.1 million in other miscellaneous income, partially offset by a loss of $0.3 million on sales and dispositions of surplus FF&E located in several of our hotels and in our corporate office. In 2009, we recognized $0.9 million in interest income, $0.4 million on the sale of surplus FF&E located in two of our hotels and $0.1 million in other miscellaneous income.    

Interest expense. Interest expense is as follows (in thousands):

                                                Year Ended        Year Ended        Year Ended                                             December 31,      December 31,      December 31,                                                 2011              2010              2009 Interest expense                           $       75,995    $       64,813    $       71,282 Interest expense - default rate                         -               884               472 Loss on derivatives                                 2,655                 -                 - Accretion of Senior Notes                           1,062               996             1,813 Amortization of deferred financing fees             3,232             1,585             1,811 Write-off of deferred financing fees                   21             1,585               284 Loan penalties and fees                                 -               311               207                                            $       82,965    $       70,174    $       75,869     Interest expense increased $12.8 million, or 18.2%, during the year ended December 31, 2011 as compared to the year ended December 31, 2010. Mortgage interest expense increased $11.2 million during 2011 as compared to 2010 due to increased loan balances as we assumed $270.0 million of non-recourse senior mortgage and mezzanine debt in connection with our acquisition of the outside 62.0% equity interests in our Doubletree Guest Suites Times Square joint venture in January 2011 (which loan we refinanced in October 2011 with a new $180.0 million non-recourse mortgage), and a $42.2 million loan in connection with our acquisition of the JW Marriott New Orleans in February 2011. Our loan balances also increased during 2011 as compared to 2010 due to a $240.0 million loan entered into by our Hilton San Diego Bayfront joint venture in April 2011. In addition, interest expense increased $2.7 million during 2011 as compared to 2010 related to losses recognized on interest rate cap agreements on the Doubletree Guest Suites Times Square and Hilton San Diego Bayfront loans, combined with a loss on an interest rate swap agreement on the JW Marriott New Orleans loan. Interest expense also increased during 2011 as compared to 2010 due to a $1.6 million increase in amortization of deferred financing fees related to additional fees paid in association with our Doubletree Guest Suites Times Square, JW Marriott New Orleans and Hilton San Diego Bayfront acquisitions, as well as to fees incurred on our line of credit and on our refinancing of the Doubletree Guest Suites Times Square in October 2011 and the Hilton Times Square in November 2010. Accretion of Senior Notes also caused interest expense to increase by $0.1 million in 2011 as compared to 2010. These increases were partially offset by additional interest expenses incurred in 2010 related to our elective defaults pursuant to our 2009 secured debt restructuring program as one of the lenders increased our interest rate by 5.0% causing an additional $1.2 million in default interest, penalties and fees. In addition, interest expense for 2011 decreased as compared to 2010 as we incurred $1.6 million in 2010 related to the write-off of deferred financing fees. During 2010, we wrote-off $1.5 million in deferred financing fees related to the termination of our credit facility in February 2011, and $0.1 million in deferred financing fees related to the release of three hotels from the Mass Mutual loan.                                           41 

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    Interest expense decreased $5.7 million, or 7.5%, during the year ended December 31, 2010 as compared to the year ended December 31, 2009. Interest expense decreased $6.5 million during 2010 as compared to 2009 as a result of decreases in our loan balances combined with our repurchase of $64.0 million in aggregate principal amount of the Senior Notes in the first quarter of 2009 and an additional $123.5 million in the second quarter of 2009, as well as the repayment of $83.0 million in April 2010 to release three hotels from the Mass Mutual loan. In addition, interest expense due to the accretion of Senior Notes decreased $0.8 million during 2010 as compared to 2009 due to the repurchases of the Senior Notes in 2009. Interest expense also decreased $0.2 million during 2010 as compared to 2009 due to a decrease in amortization of deferred financing fees related to the repayment of the $83.0 million noted above, as well as the termination of our credit facility in February 2010, partially offset by an increase in fees associated with our new credit facility entered into in November 2010, combined with our repurchase of the Senior Notes and the amendment of our loan on the Renaissance Baltimore during the third quarter of 2009. These decreases were partially offset by an increase of $1.3 million in interest expense due to the write-off of deferred financing fees. During 2010, we wrote-off $1.5 million in deferred financing fees related to the termination of our credit facility in February 2010, and $0.1 million in deferred financing fees related to the release of the three hotels from the Mass Mutual loan in April 2010. During 2009, we wrote off $0.3 million in deferred financing fees associated with the amendment of our credit facility. Interest expense also increased during 2010 as compared to 2009 due to our elective defaults pursuant to our 2009 secured debt restructuring program as one of the lenders increased our interest rate by 5.0% causing an additional $0.4 million in default interest and an additional $0.1 million in penalties and fees.    Our weighted average interest rate per annum, including the effect of our interest rate derivatives, was approximately 5.0% at December 31, 2011, 5.5% at December 31, 2010 and 5.6% at December 31, 2009. At December 31, 2011, approximately 73.4% of our outstanding notes payable had fixed interest rates. At both December 31, 2010 and 2009, all of the outstanding notes payable included in our continuing operations had fixed interest rates. In October 2011, we refinanced the $270.0 million non-recourse senior mortgage and mezzanine debt secured by interests in the Doubletree Guest Suites Times Square which bore interest at a blended rate of 3-month LIBOR plus 115 basis points for a $180.0 million non-recourse non-recourse mortgage which bears interest at a floating rate of 3-month LIBOR plus 325 basis points, which will cause our interest expense to increase going forward.    Gain on remeasurement of equity interests. Gain on remeasurement of equity interests totaled $69.2 million for the year ended December 31, 2011, and zero for both the years ended December 31, 2010 and 2009. In January 2011, we purchased the outside interests in both our Doubletree Guest Suites Times Square joint venture and our BuyEfficient joint venture, and became the sole owner of both entities. Previously, our investment in the Doubletree Guest Suites Times Square joint venture consisted of a 38.0% equity interest in the hotel and a $30.0 million, 8.5% mezzanine loan maturing in January 2017 secured by the equity interests in the hotel. During the fourth quarter of 2009, the Doubletree Guest Suites Times Square recorded an impairment loss, effectively reducing our investment in the partnership to zero as of December 31, 2009. In conjunction with the acquisition of the outside 62.0% equity interests in the Doubletree Guest Suites Times Square in January 2011, we adjusted both our investment in the Doubletree Guest Suites Times Square joint venture and the mezzanine loan to their fair market values, and recorded gains totaling $60.5 million on the remeasurement. In addition, in conjunction with the acquisition of the outside 50.0% equity interest in the BuyEfficient joint venture in January 2011, we adjusted our investment up to its fair market value, and recorded a gain of $8.7 million on the remeasurement.    Gain on extinguishment of debt. Gain on extinguishment of debt totaled zero for both the years ended December 31, 2011 and 2010, and $54.5 million for the year ended December 31, 2009. During 2009, we recognized a gain of $54.5 million due to the repurchase and cancellation of $187.5 million in aggregate principal amount of the Senior Notes.    

Income (loss) from discontinued operations. Income (loss) from discontinued operations is as follows (in thousands):

                                               Year Ended        Year Ended        Year Ended                                            December 31,      December 31,      December 31,                                                2011              2010              2009 Operating revenues                        $       18,059    $       89,652    $      151,322 Operating expenses                               (13,926 )         (80,896 )        (126,921 ) Interest expense                                    (567 )         (17,828 )         (23,368 ) Depreciation and amortization expense             (1,951 )          (8,558 )         (18,603 ) Impairment loss                                   (1,495 )               -          (195,293 ) Gain on extinguishment of debt                    18,145            86,235                 - Gain (loss) on sale of hotels and other assets, net                                 14,912                 -           (13,052 ) Income (loss) from discontinued operations                                $       33,177    $       68,605    $     (225,915 )                                            42 

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    As described under "-Investing Activities-Dispositions," we sold two hotels and a commercial laundry facility during 2011 and three hotels during 2009. In addition, pursuant to our 2009 secured debt restructuring program we reclassified the operating results of 11 hotels to discontinued operations in 2010: W San Diego, which was transferred to a receiver in September 2009 and deeded back to the lender in July 2010; Renaissance Westchester, which was transferred to a receiver in December 2009 and reacquired by the Company in June 2010; Marriott Ontario Airport, which was transferred to a receiver in March 2010 and sold by the receiver in August 2010; and the Mass Mutual eight hotels, which were deeded back to the lender in November 2010. As a result of these deed backs and title transfers, we have disposed of all assets and liabilities from our operations held for non-sale disposition segment. Accordingly, all assets, liabilities and the operations from our non-sale disposition segment have been reclassified to discontinued operations. Consistent with the Property, Plant and Equipment Topic of the FASB ASC, we have reclassified the results of operations, along with any gains on extinguishment of debt, gains or losses on sales and impairments recognized, for all 16 of these hotels and the commercial laundry facility to discontinued operations.    Income from consolidated joint venture attributable to non-controlling interest. Income from consolidated joint venture attributable to non-controlling interest totaled $0.3 million for the year ended December 31 2011, and zero for both the years ended December 31, 2010 and 2009. In April 2011 we purchased a 75.0% majority interest in the entity that owns the Hilton San Diego Bayfront. Consistent with the Presentation Topic of the FASB ASC, our net income for the year ended December 31, 2011 includes 100% of the net income generated during our ownership period by the entity that owns the Hilton San Diego Bayfront. The outside 25.0% interest in the entity that owns the Hilton San Diego Bayfront earned net income of $0.3 million for the year ended December 31, 2011.    Distributions to non-controlling interest. Distributions to non-controlling interest totaled $30,000 for the year ended December 31, 2011, and zero for both the years ended December 31, 2010 and 2009. We purchased the outside 62.0% equity interests in our Doubletree Guest Suites Times Square joint venture in January 2011, and, as a result, we became the sole owner of the entity that owns the hotel. Preferred dividends earned by investors from the entity that owns the Doubletree Guest Suites Times Square, net of related administrative fees totaled $30,000 for the year ended December 31, 2011.    Dividends paid on unvested restricted stock compensation. Common stock dividends earned on our unvested restricted stock awards were zero for both of the years ended December 31, 2011 and 2010, and $0.4 million for the year ended December 31, 2009.    Preferred stock dividends and accretion. Preferred stock dividends and accretion totaled $27.3 million for the year ended December 31, 2011, and $20.7 million for both the years ended December 31, 2010 and 2009. Preferred stock dividends and accretion increased $6.7 million, or 32.3% during 2011 as compared to 2010 due primarily to our issuance of 4,600,000 shares of Series D preferred stock in April 2011, which caused us to incur an additional $6.8 million in dividends during 2011. This increase was slightly offset by a reduction in preferred stock accretion due to the initial carrying value of our Series C preferred stock being fully accreted to its redemption value during the third quarter of 2010. Preferred stock dividends and accretion decreased $0.1 million, or 0.5% during 2010 as compared to 2009. Though the dividend rate for our Series A preferred stock and Series C preferred stock remained at $2.00 and $1.572, respectively, per share for 2010 and 2009, preferred stock dividends and accretion decreased in 2010 due to the initial carrying value of our Series C preferred stock being fully accreted to its redemption value during the third quarter of 2010.    Undistributed income allocated to unvested restricted stock compensation. In accordance with the Earnings Per Share Topic of the FASB ASC, 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. As such, undistributed income of $0.6 million for 2011, $0.1 million for 2010 and zero for 2009 were allocated to the participating securities.    Investing Activities    Acquisitions. While recovery is likely to remain uneven, we believe we are currently in the early stages of a recovery phase of the lodging cycle. We further believe that hotels acquired over the next several quarters are likely to benefit from a multi-year recovery in hotel profitability, and are likely to create long-term value in excess of our investment hurdles. Therefore, we have deployed a portion of our excess cash balance during 2010 and 2011 towards selective acquisitions. The following table sets forth the hotels we have acquired or reacquired since January 1, 2009:                                           43  --------------------------------------------------------------------------------

   Table of Contents    Hotels                                                 Rooms      Acquisition Date 2011: Doubletree Guest Suites Times Square, New York City, New York                                             460    January 14, 2011 JW Marriott New Orleans, New Orleans, Louisiana (1)                                                        494    February 15, 2011 Hilton San Diego Bayfront, San Diego, California         1,190    April 15, 2011 2010: Renaissance Westchester, White Plains, New York (2)                                                   347    June 14, 

2010

 Royal Palm Miami Beach, Miami Beach, Florida (3)           409    August 27, 2010 2009: No hotel acquisitions                                        - Total January 1, 2009 to December 31, 2011               2,900     -------------------------------------------------------------------------------- (1)                 Subsequent to this acquisition, the Company added two 

additional rooms to this hotel, increasing the room count to 496.

  (2)                 Hotel deeded back to the lender and reacquired by the 

Company on June 14, 2010.

  (3)                 Hotel sold by the Company on April 8, 2011.    

The total cost for these five hotel acquisitions was approximately $414.3 million, or $143,000 per room. Each of these acquisitions is discussed below.

    In January 2011, we purchased the outside 62.0% equity interests in our 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 460-room Doubletree Guest Suites Times Square located in New York City, New York. The hotel was encumbered by $270.0 million of non-recourse senior mortgage and mezzanine debt which was to mature in January 2012, and which bore a blended interest rate of 3-month LIBOR plus 115 basis points. We 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. We funded the remainder of the repayment of the prior loan with approximately $90.0 million of our unrestricted cash. The hotel was encumbered by an additional $30.0 million mezzanine loan that was owned by the Company, and, therefore, eliminated in consolidation on our balance sheets until the mezzanine loan was satisfied in conjunction with our refinancing of the debt secured by the Doubletree Guest Suites Times Square in October 2011. In conjunction with the purchase of the outside 62.0% equity interests in our Doubletree Guest Suites Times Square joint venture, we recognized a gain of $30.1 million on the remeasurement of our equity interest in this joint venture to its fair market value, and a gain of $30.4 million on the remeasurement of our investment in the $30.0 million mezzanine loan, which we purchased in April 2010 for $3.45 million, to its fair market value.    In February 2011, we purchased the 494-room JW Marriott New Orleans located in New Orleans, Louisiana for approximately $51.6 million in cash and the assumption of a $42.2 million floating-rate, non-recourse senior mortgage. The mortgage, which matures in September 2015, has been swapped to a fixed rate of 5.45%, and is subject to a 25-year amortization schedule. Subsequent to this acquisition, we added two additional rooms to this hotel, increasing the room count to 496.    In April 2011, we paid $182.8 million to acquire a 75.0% majority interest in the joint venture that owns the 1,190-room Hilton San Diego Bayfront hotel located in San Diego, California, which implied a gross value of approximately $475.0 million. Concurrent with the acquisition, the joint venture entered into a new $240.0 million mortgage financing secured by the hotel. The mortgage bears a floating rate of interest of 3-month LIBOR plus 325 basis points, matures in April 2016 and is subject to a 30-year amortization schedule.    In June 2010, we reacquired the 347-room Renaissance Westchester in White Plains, New York. In 2009, we transferred possession and control of the hotel to a court-appointed receiver pursuant to our 2009 secured debt restructuring program. In connection with this transfer, we deconsolidated this hotel and reclassified the assets and liabilities, including the $25.2 million hotel net asset and the hotel's $29.2 million 4.98% non-recourse mortgage, to discontinued operations on our balance sheets. Additionally, we reclassified the Renaissance Westchester's results of operations and cash flows to discontinued operations on our statements of operations and cash flows. We reacquired the Renaissance Westchester in June 2010 for $26.0 million, including $1.2 million of restricted cash and related costs for a net purchase price of $24.8 million. In connection with the repurchase of the Renaissance Westchester, the $29.2 million non-recourse mortgage was cancelled. We recorded a $6.7 million gain on extinguishment of debt to discontinued operations in June 2010.    In August 2010, we used available cash on hand to acquire the Royal Palm hotel in Miami Beach, Florida at a foreclosure auction for a gross purchase price of $126.1 million excluding transaction costs. Prior to the auction, we purchased a portion of the hotel's outstanding debt at a discount to par resulting in a net purchase price of the Royal Palm hotel of approximately $117.6 million.                                           44  --------------------------------------------------------------------------------

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In addition to the above noted hotels, we deployed a portion of our excess cash in 2011 and 2010 towards alternative investments. Each of these alternative investments is discussed below.

In January 2011, we purchased the outside 50.0% equity interest in our BuyEfficient joint venture for a gross purchase price of $9.0 million. As a result, we are now the sole owner of BuyEfficient. In conjunction with this purchase, we recognized a gain of $8.7 million on the remeasurement of our equity interest in this joint venture to its fair market value.

    In April 2010, we purchased two hotel loans with a combined principal amount of $32.5 million for a total purchase price of $3.7 million. The loans included (i) a $30.0 million, 8.5% mezzanine loan maturing in January 2017 secured by the equity interests in our Doubletree Guest Suites Times Square joint venture, and (ii) 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. We purchased the mezzanine loan for $3.45 million and half of the subordinate note for $250,000. After our acquisition of the remaining interests in the Doubletree Guest Suites Times Square joint venture in January 2011, the mezzanine loan was eliminated in consolidation on our balance sheet until the mezzanine loan was satisfied in conjunction with our refinancing of the debt secured by the Doubletree Guest Suites Times Square in October 2011.    In November 2010, we 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 December 31, 2011, the subordinate note secured by the Twelve Atlantic Station was not in default, however, we are accounting 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.    Our acquisition program is aimed at generating attractive risk-adjusted returns on our investment dollars, and therefore we may target lodging assets outside of the typical branded, urban, upper upscale profile represented by our existing portfolio in order to capitalize on opportunities which may arise. We intend to select the brands and operators for our hotels that we believe will lead to the highest returns. Additionally, the scope of our acquisitions program may include large hotel portfolios or hotel loans. Future acquisitions may be funded by our issuance of additional debt or equity securities, including our common and preferred OP units, or by draws on our $150.0 million senior corporate credit facility entered into in November 2010. However, in light of our current balance sheet objectives, we expect to fund any near term acquisitions, assuming acquisition opportunities generate returns that exceed our cost of capital, with a greater proportion of equity capital than debt capital.    Dispositions. The following table sets forth the hotels we have sold or disposed of since January 1, 2009:    Hotels                                               Rooms        Disposition Date 2011: Royal Palm Miami Beach, Miami Beach, Florida               409    April 8, 

2011

 Valley River Inn, Eugene, Oregon                           257    October 26, 2011 2010: Renaissance Westchester, White Plains, New York (1) (2)                                               347    June 14, 

2010

 W Hotel, San Diego, California (1)                         258    July 2, 

2010

 Marriott, Ontario Airport, California (1)                  299    August 12, 2010 Courtyard by Marriott, San Diego (Old Town), California (1)                                             176    November 1, 2010 Hilton, Huntington, New York (1)                           302    November 1, 2010 Holiday Inn Downtown, San Diego, California (1)                                                        220    November 1, 2010 Holiday Inn Express, San Diego (Old Town), California (1)                                             125    November 1, 2010 Marriott, Provo, Utah (1)                                  330    November 1, 2010 Marriott, Salt Lake City (University Park), Utah (1)                                                   218    November 1, 2010 Renaissance Atlanta Concourse, Atlanta, Georgia (1)                                                387    November 1, 2010 Residence Inn by Marriott, Manhattan Beach, California (1)                                             176    November 1, 2010 2009: Marriott, Napa, California                                 274    May 20, 2009 Marriott, Riverside, California                            292    June 18, 

2009

 Hyatt Suites Atlanta Northwest, Marietta, Georgia                                                    202    July 31, 

2009

 Total January 1, 2009 to December 31, 2011               4,272     -------------------------------------------------------------------------------- (1)                 Hotels deeded back to the lenders, or sold by the 

receiver,

pursuant to our 2009 secured debt restructuring program.

 (2)                 Hotel reacquired by the Company on June 14, 2010.                                           45 

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    The aggregate net sale proceeds for the two hotels sold in 2011 and the three hotels sold in 2009 was $207.2 million, including the Royal Palm note, or $145,000 per room. The 11 hotels disposed of in 2010 pursuant to our secured debt restructuring program eliminated $282.7 million of debt from our balance sheet. The results of operations of all of the hotels identified above and the gains or losses on dispositions and extinguishments of debt through December 31, 2011 are included in discontinued operations for all periods presented through the time of sale. The cash proceeds from the sales are included in our cash flows from investing activities for the respective periods. Each of these dispositions is discussed below.    We sold two hotels in 2011. In April 2011, we sold the Royal Palm Miami Beach for net proceeds of $129.8 million, including $40.0 million in cash and the $90.0 million Royal Palm note, and recognized a gain on the sale of $14.0 million. We sold the Royal Palm note in October 2011 for net proceeds of approximately $79.2 million. In anticipation of this sale, we recorded an impairment loss of $10.9 million in September 2011. We retained an earn-out right on the Royal Palm hotel which will enable us to receive future payments of up to $20.0 million in the event that the hotel achieves certain return hurdles. In October 2011, we 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.    We did not sell any hotels during 2010. We did, however, complete the disposal of 11 hotels pursuant to our secured debt restructuring program, which we initiated in 2009. In June 2010, we disposed of the Renaissance Westchester, and subsequently reacquired the hotel from the lender during the same month. We completed the deed back of the W San Diego in July 2010, and title to the hotel was transferred to the lender. In August 2010, the Marriott Ontario Airport was sold by the receiver, and title to the hotel was transferred to the third party purchaser. In November 2010, we completed the deed back of the Mass Mutual eight hotels, and titles to the hotels were transferred to the lender. As of December 31, 2010, five of the Mass Mutual eight hotels remained subject to franchise agreements which contained corporate guaranties. If the franchise agreements on these five hotels were to be terminated, we were potentially liable for up to $19.6 million in termination fees. In June 2011, we paid termination fees of $1.5 million related to one of these five hotels, and the franchise agreements on the remaining four hotels were transferred to new owners, resulting in our recording $18.1 million to gain on extinguishment of debt in June 2011, which is included in discontinued operations.    We sold three hotels in 2009. In May 2009, we sold the Marriott Napa Valley for net proceeds of $34.8 million, and recognized a loss on the sale of $13.7 million. In June 2009, we sold the Marriott Riverside for net proceeds of $18.7 million and recognized a gain on the sale of $2.9 million. In July 2009, we sold the Hyatt Suites Atlanta Northwest for net proceeds of $7.8 million and recognized a net gain on the sale of $18,000, after having recorded an impairment loss in June 2009 of $4.9 million in order to reduce the carrying value of this hotel on our balance sheet to its fair value.    

The following table summarizes our portfolio and room data from January 1, 2009 through December 31, 2011, adjusted for the hotels acquired, reacquired, disposed through non-sale disposition and sold during the respective periods.

                                           2011   2010   2009 

Portfolio Data-Hotels Number of hotels-beginning of period 31 40 43 Add: Acquisitions

                         3      1      - Add: Reacquisitions                       -      1      - Less: Dispositions                       (2 )    -     (3 ) Less: Non-sale dispositions               -    (11 )    - Number of hotels-end of period           32     31     40                                              2011     2010     2009

Portfolio Data-Rooms Number of rooms-beginning of period 11,722 13,804 14,569 Add: Acquisitions

                        2,144      409        - Add: Reacquisitions                          -      347        - Add: Room expansions                         8        -        3 Less: Dispositions                        (666 )      -     (768 ) Less: Non-sale dispositions                  -   (2,838 )      - Number of rooms-end of period           13,208   11,722   13,804 

Average rooms per hotel-end of period 413 378 345

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    In addition to the above noted hotel dispositions, in July 2011, we sold our 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, we recorded an impairment loss of $1.5 million in June 2011, which is included in discontinued operations.    Renovations. During 2011, we invested $100.4 million in capital improvements to our hotel and other real estate portfolio. Consistent with our cycle-appropriate strategy, this investment in capital improvements to our portfolio was $43.4 million more than the amount we invested in 2010 and $56.3 million more than the amount we invested in 2009.   

Liquidity and Capital Resources

    Historical. During the periods presented, our sources of cash included our operating activities, working capital, sales of hotel properties and other assets, distributions received from our unconsolidated joint ventures, proceeds from issuance of notes payable and our credit facility, and proceeds from our offerings of common and preferred stock. Our primary uses of cash were for acquisitions of hotel properties and other assets, capital expenditures for hotels, operating expenses, purchases of notes receivable, repayment of notes payable (including repurchases of Senior Notes) and our credit facility, repurchases of our common stock, and dividends on our preferred stock. We cannot be certain that traditional sources of funds will be available in the future.    Operating activities. Our cash provided by or used in operating activities fluctuates primarily as a result of changes in RevPAR and operating cash flow through of our hotels. Our net cash provided by or used in operating activities may also be affected by changes in our portfolio resulting from hotel acquisitions, dispositions or renovations. Net cash provided by operating activities was $156.4 million for 2011 compared to $43.6 million for 2010, and $64.8 million for 2009. The increase in 2011 as compared to 2010 was primarily due to our acquisitions of the new hotels, combined with increased earnings at our existing hotels. The decrease in 2010 as compared to 2009 was primarily due to an increase in restricted cash during 2010.    Investing activities. Our cash provided by or used in investing activities fluctuates primarily as a result of acquisitions, dispositions and renovations of hotels. Net cash used in investing activities in 2011 and 2010 and net cash provided by investing activities in 2009 was as follows (in thousands):                                                Year Ended        Year Ended        Year Ended                                            December 31,      December 31,      December 31,                                                2011              2010              2009 Proceeds from sales of hotel properties and other assets               $       44,576    $           63    $       64,073 Cash received from unconsolidated joint venture                                          -               900               500 Restricted cash - replacement reserve             (8,143 )            (931 )          (1,823 ) Acquisitions of notes receivable                       -            (3,950 )               - Proceeds received from sale of note receivable                                        79,194                 -                 - Acquisitions of hotel properties and other assets                                    (263,264 )        (142,410 )               - Renovations and additions to hotel properties and other real estate                (100,400 )         (56,984 )         (44,105 ) Payments for interest rate derivatives            (1,082 )               -                 - Net cash (used in) provided by investing activities                      $     (249,119 )  $     (203,312 )  $       18,645     Net cash used in investing activities was $249.1 million in 2011, as compared to net cash used of $203.3 million in 2010, and net cash provided of $18.6 million in 2009. During 2011, we received net proceeds of $39.8 million from our sale of the Royal Palm Miami Beach, $0.1 million from our sale of the commercial laundry facility located in Salt Lake City, Utah, $16.1 million from our sale of the Valley River Inn partially offset by $11.5 million of debt assigned to the buyer of the hotel and an additional $0.1 million from the sale of surplus FF&E, for a total cash inflow of $44.6 million. In addition, during 2011, we received net proceeds of $79.2 million from the sale of the Royal Palm note. These cash inflows were offset as we increased the balance in our restricted cash replacement reserve accounts by $8.1 million, paid cash of $263.3 million to acquire hotel properties and other assets, paid cash of $100.4 million for renovations and additions to our portfolio, and paid cash of $1.1 million for interest rate derivative agreements. The $263.3 million total cash paid for acquisitions during 2011 is comprised of the following: $37.5 million for the outside 62.0% equity interests in our Doubletree Guest Suites Times Square, partially offset by $13.0 million of unrestricted cash acquired upon acquisition; $51.6 million for the JW Marriott New Orleans; $182.8 million for the 75.0% majority interest in the entity that owns the Hilton San Diego Bayfront, partially offset by $3.7 million of unrestricted cash acquired upon acquisition; and $9.0 million for the outside 50.0% equity interest in our BuyEfficient joint venture, partially offset by $0.9 million of unrestricted cash acquired upon acquisition.    During 2010, we paid $117.6 million to acquire the Royal Palm Miami Beach and $24.8 million to reacquire the Renaissance Westchester, for a total cash outlay of $142.4 million. In addition, we increased the balance in our restricted cash replacement reserve accounts by $0.9 million, and we paid $4.0 million for the purchase of two notes receivable and $57.0 million for renovations and additions to our portfolio. These cash outflows were partially offset by $0.1 million of proceeds received from the sale of surplus FF&E at several of our hotels and our corporate office and distributions of $0.9 million received from our BuyEfficient joint venture.                                           47 

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    During 2009, we received $64.1 million from the sale of hotel properties and other assets, which included $61.3 million from the sale of three hotels, a $2.0 million payment on a note receivable from the buyer of a hotel we sold in December 2008, $0.4 million from the sale of certain excess FF&E located in two of our hotels, and $0.4 million from the sales of two vacant parcels of land. In addition, we received $0.5 million from our BuyEfficient joint venture, increased the balance in our restricted cash replacement reserve accounts by $1.8 million, and paid cash of $44.1 million for renovations and additions to our portfolio.    Financing activities. Our cash provided by or used in financing activities fluctuates primarily as a result of our issuance and repayment of notes payable, including the repurchase of Senior Notes, issuance and repayments on our credit facility and the issuance and repurchase of other forms of capital, including preferred equity and common stock. Net cash used in financing activities was $32.8 million in 2011, as compared to net cash provided of $82.6 million in 2010, and net cash provided of $93.8 million in 2009. Net cash used in financing activities for 2011 consisted of $568.3 million in principal payments on notes payable and our credit facility, including $233.8 million to repay an existing mortgage upon the acquisition of our Hilton San Diego Bayfront joint venture, $270.0 million to repay non-recourse senior mortgage and mezzanine debt upon our refinancing of the Doubletree Guest Suites Times Square, $40.0 million to repay a draw on our credit facility and $24.5 million of principal payments on our notes payable. In addition, we paid $9.0 million in deferred financing costs related to our assumptions of debt on the Doubletree Guest Suites Times Square and the JW Marriott New Orleans in connection with the acquisitions of these two hotels, the issuance of a note payable to our Hilton San Diego Bayfront joint venture, the refinancing of debt secured by the Doubletree Guest Suites Times Square, as well as costs related to our credit facility. We also paid dividends totaling $25.0 million to our stockholders and distributions totaling $1.3 million to partners in our joint ventures. These cash outflows were partially offset during 2011 by the receipt of $110.9 million in net proceeds from the issuance of our Series D preferred stock, and $460.0 million in proceeds from the issuance of notes payable and a draw on our credit facility. The $460.0 million includes $240.0 million received from the issuance of a note payable to our Hilton San Diego Bayfront joint venture, $180.0 million received from the refinancing of debt on our Doubletree Guest Suites Times Square and $40.0 million received from a draw on our credit facility.    Net cash provided by financing activities for 2010 consisted primarily of $190.6 million in net proceeds received from the issuance of common stock and $92.5 million in proceeds received from the new loan on the Hilton Times Square. These cash inflows were partially offset by $175.2 million of principal payments on our notes payable, including $83.0 million paid to release three hotels from the Mass Mutual loan, $81.0 million to pay off the loan on the Hilton Times Square in connection with the refinance of the loan and $11.2 million of principal amortization. In addition, net cash provided by financing activities for 2010 includes $20.5 million of dividends paid to our stockholders, and $4.8 million in deferred financing costs paid in connection with our new credit facility and the refinancing of the Hilton Times Square loan.    Net cash provided by financing activities in 2009 consisted primarily of $257.1 million in net proceeds received from the issuance of common stock and $60.0 million in proceeds received from our credit facility. These cash inflows were partially offset by $117.5 million used to repurchase a portion of our Senior Notes including related costs, $74.4 million of principal payments on our notes payable and credit facility, $27.9 million of dividends paid to our stockholders, and $3.5 million in deferred financing fees paid in connection with amendments to our Senior Notes indenture, our credit facility and our loan secured by the Renaissance Baltimore.    Future. We expect our primary uses of cash to be for acquisitions of hotels, including possibly hotel portfolios, capital investments in our hotels, operating expenses, repayment of principal on our notes payable and credit facility, interest expense and dividends. We expect our primary sources of cash will continue to be our operating activities, working capital, notes payable, sales of hotel properties, and proceeds from public and private offerings of debt securities and common and preferred stock. Our ability to incur additional debt depends on a number of factors, including our leverage, the value of our unencumbered assets and borrowing restrictions imposed by lenders under our existing notes payable, as well as other factors affecting the general willingness or ability of lenders to provide loans. In addition, our financial objectives include the measured improvement of our credit ratios, maintenance of appropriate levels of liquidity, and a gradual reduction in our financial leverage. In the near-term, we expect to fund acquisitions largely through the issuance of equity in order to grow the company and reduce leverage. Our ability to raise funds through the issuance of equity securities depends on, among other things, general market conditions for hotel companies and REITs and market perceptions about us. We will continue to analyze alternate sources of capital in an effort to minimize our capital costs and maximize our financial flexibility. However, when needed, the capital markets may not be available to us on favorable terms or at all.    We believe that our current cash balance, our cash flow from operations, our access to capital markets and our unencumbered properties will provide us with sufficient liquidity to meet our current operating expenses and other expenses directly associated with our business (including payment of dividends on our capital stock, if declared) for the foreseeable future, and in any event for at least the next 12 months.                                           48 

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    Debt. In connection with our purchase of the outside 62.0% equity interests in our Doubletree Guest Suites Times Square in January 2011, we assumed $270.0 million of non-recourse senior mortgage and mezzanine debt which was scheduled to mature in January 2012, and which bore a blended interest rate of 3-month LIBOR plus 115 basis points. We 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. 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. In conjunction with this refinancing, we entered into an interest rate protection agreement which caps the 3-month LIBOR rate on the new mortgage at 4.0% until October 2015. We funded the remainder of the repayment of the prior loan with approximately $90.0 million of our unrestricted cash.    Our purchase of the JW Marriott New Orleans in February 2011 included the assumption of a $42.2 million floating-rate, non-recourse senior mortgage. The mortgage, which matures in September 2015, has been swapped to a fixed rate of 5.45%, and is subject to a 25-year amortization schedule.    Concurrent with our acquisition in April 2011 of a 75.0% majority interest in the joint venture that owns the Hilton San Diego Bayfront, the joint venture entered into a new $240.0 million mortgage secured by the hotel. The mortgage bears a floating rate of interest of 3-month LIBOR plus 325 basis points, matures in April 2016 and is subject to a 30-year amortization schedule.    

In February 2012, we repurchased $4.5 million of our Senior Notes for a price of $4.57 million plus accrued interest of approximately $13,000.

    In February 2010, we elected to terminate our existing $80.0 million credit facility, and we wrote off $1.5 million in related deferred financing costs. The termination of the facility eliminated approximately $0.6 million in fees and associated costs per annum. In November 2010, we entered into a new $150.0 million senior corporate credit facility (the "new credit facility"). The interest rate for the new credit facility ranges from 325 to 425 basis points over LIBOR, depending on our overall leverage. The initial term of the new credit facility is three years with an option to extend for an additional one year. Subject to approval by the lender group, the new credit facility may be increased to $250.0 million. The new credit facility contains customary events of default relating to payments and breaches of representations and warranties, and is secured by pledges of the equity interests in subsidiaries holding 11 of our unencumbered hotels (Courtyard by Marriott Los Angeles, Fairmont Newport Beach, Hyatt Regency Newport Beach, Kahler Inn & Suites, Marriott Quincy, Marriott Portland, Marriott Rochester, Renaissance Los Angeles Airport, Renaissance Westchester, Residence Inn by Marriott Rochester and Sheraton Cerritos).    In November 2010, we entered into a new $92.5 million non-recourse mortgage on our Hilton Times Square. The new mortgage matures in 2020 and bears a fixed interest rate of 4.97%, with scheduled monthly principal and interest amounts based on a 30-year amortization. The proceeds from the new mortgage were used in part to repay the maturing $81.0 million mortgage on our Hilton Times Square, which bore an interest rate of 5.915%. Excess proceeds were retained for general corporate purposes. The new mortgage contains customary events of default relating to payments and breaches of representations and warranties.    As of December 31, 2011, we had $1.6 billion of debt, $218.4 million of cash and cash equivalents, including restricted cash, and total assets of $3.1 billion. We believe that by controlling debt levels, staggering maturity dates and maintaining a highly flexible capital structure, we can maintain lower capital costs than more highly leveraged companies, or companies with limited flexibility due to restrictive corporate-level financial covenants.    As of December 31, 2011, all of our outstanding debt had fixed interest rates, except the $237.8 million non-recourse mortgage on the Hilton San Diego Bayfront and the $180.0 million non-recourse mortgage on the Doubletree Guest Suites Times Square, both of which are subject to interest rate cap agreements. The interest rate cap agreement on the Hilton San Diego Bayfront mortgage matures in April 2013, and caps the 3-month LIBOR rate at 3.75%. The interest rate cap agreement on the Doubletree Guest Suites Times Square mortgage matures in October 2015, and caps the 3-month LIBOR rate at 4.0%. The majority of our mortgage debt is in the form of single asset loans. We currently believe this structure is appropriate for the operating characteristics of our business and provides flexibility for assets to be sold subject to the existing debt, and as evidenced by our 2009 secured debt restructuring program, in instances where asset values have declined to levels below the principal amount of the associated mortgage, non-recourse single asset mortgages may limit the degradation in value experienced by our stockholders by shifting a portion of asset risk to our secured lenders.    As of December 31, 2011, the weighted average term to maturity of our debt is approximately 6 years, and 73.4% of our debt is fixed rate with a weighted average interest rate of 5.5%. The weighted average interest rate on all of our debt, which includes the effect of our interest rate derivative agreements based on the variable rates at December 31, 2011, is 5.0%.                                           49  --------------------------------------------------------------------------------

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    Financial Covenants. We are subject to compliance with various covenants under the Series C preferred stock and the Senior Notes. With respect to our Series C preferred stock, if we fail to meet certain financial ratios for four consecutive quarters, a financial ratio violation will occur. During the continuation of a financial ratio violation, among other things, we would be restricted from paying dividends on our common stock, and may incur a 50 basis point per quarter dividend increase on the Series C preferred stock. Additionally, the Series C preferred stockholders would gain the right to appoint one board member. We do not currently expect to incur a financial ratio violation.    With respect to our Senior Notes, if the maturity dates of more than $300.0 million of our indebtedness were to be accelerated as the result of uncured defaults, either the trustee or the holders of not less than 25% in principal amount of the outstanding Senior Notes would have the right to declare the Senior Notes and any unpaid interest immediately due and payable. As of February 28, 2012, none of the maturity dates have been accelerated for any of our indebtedness.    Additionally, we may be successful in obtaining mortgages on one or all of our 11 unencumbered hotels which are currently held by subsidiaries whose interests are pledged to our credit facility at December 31, 2011: Courtyard by Marriott Los Angeles, Fairmont Newport Beach, Hyatt Regency Newport Beach, Kahler Inn & Suites, Marriott Quincy, Marriott Portland, Marriott Rochester, Renaissance Los Angeles Airport, Renaissance Westchester, Residence Inn by Marriott Rochester and Sheraton Cerritos. These 11 hotels had an aggregate of 3,357 rooms as of December 31, 2011, and generated $174.5 million in revenue during 2011. Should we obtain secured financing on any or all of our 11 unencumbered hotels, the amount of capital available through our credit facility may be reduced.    Cash Balance. We currently maintain higher than historical cash balances. By minimizing our need to access external capital by maintaining higher than typical cash balances, our financial security and flexibility are meaningfully enhanced because we are able to fund our business needs and debt maturities partially with our cash on hand. As we believe the lodging cycle has now entered a recovery phase, we expect to deploy a portion of our excess cash balance in 2012 towards debt repayments and repurchases, selective acquisitions and capital investments in our portfolio. During 2011, we selectively deployed a portion of our excess cash balance towards the following acquisitions:  the outside 62.0% equity interests in our Doubletree Guest Suites Times Square joint venture; the outside 50.0% equity interest in our BuyEfficient joint venture; the JW Marriott New Orleans; and a 75.0% majority interest in the entity that owns the Hilton San Diego Bayfront. Our acquisition program is aimed at generating attractive risk-adjusted returns on our investment dollars, and therefore we may target lodging assets outside of the typical branded, urban, upper upscale profile represented by our existing portfolio in order to capitalize on opportunities which may arise. Additionally, the scope of our acquisitions program may include large hotel portfolios or hotel loans.    Contractual Obligations   

The following table summarizes our payment obligations and commitments as of December 31, 2011 (in thousands):

                                                           Payment due by period                                                 Less than      1 to 3       3 to 5      More than 5                                     Total         1 year        years        years         years                                                            (in thousands) Notes payable                    $ 1,571,612    $   53,935    $ 117,096    $ 732,035    $    668,546 Interest obligations on notes payable (1)                          399,558        76,645      146,875      105,581          70,457 Operating lease obligations          436,622         8,624       17,454       17,691         392,853 Construction commitments              25,263        25,263            -            -               - Employment obligations                 2,533         1,525        1,008            -               - Total                            $ 2,435,588    $  165,992    $ 282,433    $ 855,307    $  1,131,856    

-------------------------------------------------------------------------------- (1)                         Interest on variable-rate debt obligations is 

calculated based on the variable rates at December 31, 2011 and includes the effect of our interest rate derivative agreements.

Capital Expenditures and Reserve Funds

    We believe we maintain each of our hotels in good repair and condition and in general conformity with applicable franchise and management agreements, ground and air leases, laws and regulations. Our capital expenditures primarily relate to the ongoing maintenance of our hotels and are budgeted in the reserve accounts described in the following paragraph. We also incur capital expenditures for renovation and development. We invested $100.4 million in our portfolio during 2011. Our renovation budget for 2012 includes $25.3 million of contractual construction commitments. If we acquire, renovate or develop additional hotels in the future, our capital expenditures will increase.    With respect to our hotels that are operated under management or franchise agreements with major national hotel brands and for all of our hotels subject to first mortgage liens, we are obligated to maintain an FF&E reserve account for future planned and emergency-related capital expenditures at these hotels. The amount funded into each of these reserve accounts is determined pursuant                                           50  --------------------------------------------------------------------------------

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    to the management, franchise and loan agreements for each of the respective hotels, ranging between 4.0% and 5.0% of the respective hotel's total annual revenue. As of December 31, 2011, $36.4 million was held in FF&E reserve accounts for future capital expenditures at the 32 hotels. According to the respective loan agreements, the reserve funds are to be held by the lenders or managers in restricted cash accounts, and we are not required to spend the entire amount in the FF&E reserve accounts each year.    Seasonality and Volatility    As is typical of the lodging industry, we experience some seasonality in our business as indicated in the table below. Revenue for certain of our hotels is generally affected by seasonal business patterns (e.g., the first quarter is strong in Orlando, the second quarter is strong for the Mid-Atlantic business hotels, and the fourth quarter is strong for New York City). Quarterly revenue also may be adversely affected by renovations, our managers' effectiveness in generating business and by events beyond our control, such as extreme weather conditions, terrorist attacks or alerts, public health concerns, airline strikes or reduced airline capacity, economic factors, natural disasters and other considerations affecting travel. Revenues for our 32 hotel Comparable Portfolio by quarter for 2009, 2010 and 2011 were as follows (dollars in thousands):                                       First         Second        Third         Fourth                                   Quarter       Quarter       Quarter       Quarter        Total Revenues 2009 Comparable Portfolio (32 Hotels) (1)                      $  181,421    $  195,847    $  186,715    $  212,115    $  776,098 2009 Revenues as a percentage of total                               23.4 %        25.2 %        24.1 %        27.3 %       100.0 % 2010 Comparable Portfolio (32 Hotels) (1)                      $  180,750    $  204,804    $  195,220    $  228,094    $  808,868 2010 Revenues as a percentage of total                               22.4 %        25.3 %        24.1 %        28.2 %       100.0 % 2011 Comparable Portfolio (32 Hotels) (1)                      $  189,650    $  217,626    $  207,492    $  240,362    $  855,130 2011 Revenues as a percentage of total                               22.2 %        25.4 %        24.3 %        28.1 %       100.0 %    

-------------------------------------------------------------------------------- (1)          Includes all 32 hotels in which the Company has interests as of December 31, 2011. Includes prior ownership results for the Doubletree Guest Suites Times Square, the JW Marriott New Orleans and the Hilton San Diego Bayfront for all periods presented, as well as operating results for the Renaissance Westchester while it was held in receivership and reclassified to discontinued operations, prior to the Company's reacquisition in June 2010.    Inflation   

Inflation may affect our expenses, including, without limitation, by increasing such costs as labor, food, taxes, property and casualty insurance and utilities.

    Critical Accounting Policies    Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities.    We evaluate our estimates on an ongoing basis. We base our estimates on historical experience, information that is currently available to us and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect the most significant judgments and estimates used in the preparation of our consolidated financial statements.    †          Impairment of long-lived assets and goodwill. We periodically review each property and any related goodwill for possible impairment. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. We perform a Level 3 analysis of fair value, using a discounted cash flow analysis to estimate the fair value of our properties taking into account each property's expected cash flow from operations, holding period and proceeds from the disposition of the property. The factors addressed in determining estimated proceeds from disposition include anticipated operating cash flow in the year of disposition and terminal capitalization rate. Our judgment is required in determining the discount rate applied to estimated cash flows, growth rate of the properties, operating income of the properties, the need for capital expenditures, as well as specific market and economic conditions.                                           51 

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    We account for goodwill in accordance with the Intangibles - Goodwill and Other Topic of the FASB ASC, which states that goodwill has an indefinite useful life that should not be amortized but should be reviewed annually for impairment, or more frequently if events or changes in circumstances indicate that goodwill might be impaired, as well as the Fair Value Measurements and Disclosures Topic of the FASB ASC for financial and nonfinancial assets and liabilities, which establishes a framework for measuring fair value and expands disclosures about fair value measurements by establishing a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The review of any potential goodwill impairment requires estimates of fair value for our properties that have goodwill arising from unallocated acquisition costs. These estimates of fair value are prepared using Level 3 measurements.    †          Acquisition related assets and liabilities. Accounting for the acquisition of a hotel property 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 and equipment and intangible assets. During 2011, we 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 in our purchases of 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 purchase of the 75.0% majority interest in the entity that owns the Hilton San Diego Bayfront. Due to inherent subjectivity in determining the estimated fair value of long-lived assets, we believe that the recording of acquired assets and liabilities is a critical accounting policy.    †          Depreciation and amortization expense. Depreciation expense is based on the estimated useful life of our assets. The life of the assets is based on a number of assumptions, including the cost and timing of capital expenditures to maintain and refurbish our hotels, as well as specific market and economic conditions. Hotel properties and other completed real estate investments are depreciated using the straight-line method over estimated useful lives ranging from five to 35 years for buildings and improvements and three to 12 years for furniture, fixtures and equipment. While we believe our estimates are reasonable, a change in the estimated lives could affect depreciation expense and net income or the gain or loss on the sale of any of our hotels. We have not changed the estimated useful lives of any of our assets during the periods discussed.    

New Accounting Standards and Accounting Changes

    Certain provisions of Accounting Standards Update No. 2010-06, "Fair Value Measurement (Topic 820): Improving Disclosures About Fair Value Measurements," ("ASU No. 2010-06") became effective during our 2011 first quarter. Those provisions, which amended Subtopic 820-10, require us to present as separate line items all purchases, sales, issuances, and settlements of financial instruments valued using significant unobservable inputs (Level 3) in the reconciliation of fair value measurements, in contrast to the previous aggregate presentation as a single line item. The adoption did not have a material impact on our financial statements or disclosures.    In July 2010, the FASB issued Accounting Standards Update No. 2010-20, "Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses," ("ASU No. 2010-20"). ASU 2010-20 requires entities to provide extensive new disclosures in their financial statements about their financing receivables, including credit risk exposures and the allowance for credit losses. Entities with financing receivables are required to disclose, among other things:  a rollforward of the allowance for credit losses; credit quality information such as credit risk scores or external credit agency ratings; impaired loan information; modification information; and nonaccrual and past due information.  The disclosures as of the end of a reporting period were effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period were effective for interim and annual reporting periods beginning on or after December 15, 2010.  The disclosures regarding troubled debt restructurings were effective for interim and annual reporting periods beginning on or after June 15, 2011. Our adoptions of the various components of ASU 2010-20 did not have a material impact on our financial statements or disclosures.    In May 2011, the FASB issued Accounting Standards Update No. 2011-04, "Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs," ("ASU No. 2011-04"). ASU No. 2011-04 generally provides a uniform framework for fair value measurements and related disclosures between GAAP and International Financial Reporting Standards ("IFRS"). Additional disclosure requirements in the update include: (1) for Level 3 fair value measurements, quantitative information about unobservable inputs used, a description of the valuation processes used by the entity, and a qualitative discussion about the sensitivity of the measurements to changes in the unobservable inputs; (2) for an entity's use of a nonfinancial asset that is different from the asset's highest and best use, the reason for the difference; (3) for financial instruments not measured at fair value but for which disclosure of fair value is required, the fair value hierarchy level in which the fair value measurements were determined; and (4) the disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy. ASU 2011-04 will be effective for interim and annual periods beginning on or after December 15, 2011. We are currently evaluating the impact ASU 2011-04 will have on our financial statements.                                           52 

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    In June 2011, the FASB issued Accounting Standards Update No. 2011-05, "Comprehensive Income (Topic 220): Presentation of Comprehensive Income," ("ASU No. 2011-05"). ASU No. 2011-05 amends existing guidance by allowing only two options for presenting the components of net income and other comprehensive income: (1) in a single continuous financial statement, statement of comprehensive income or (2) in two separate but consecutive financial statements, consisting of an income statement followed by a separate statement of other comprehensive income. Also, items that are reclassified from other comprehensive income to net income must be presented on the face of the financial statements. In December 2011, the FASB issued Accounting Standards Update No. 2011-12, "Comprehensive Income (Topic 220), Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05," ("ASU No. 2011-12"). ASU No. 2011-12 defers the ASU No. 2011-05 requirement that companies display reclassification adjustments for each component of other comprehensive income in both net income and other comprehensive income on the face of the financial statements. Companies are still required to present reclassifications out of other comprehensive income on the face of the financial statements or disclose those amounts in the notes to the financial statements. ASU No. 2011-12 also defers the requirement to report reclassification adjustments in interim periods. Both ASU No. 2011-05 and ASU No. 2011-12 require retrospective application, and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. We do not believe that the adoptions of either ASU No. 2011-05 or ASU No. 2011-12 will have a material impact on our financial statements.    In September 2011, the FASB issued Accounting Standards Update No. 2011-08, "Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment," ("ASU No. 2011-08"). ASU No. 2011-08 simplifies how entities test goodwill for impairment. ASU 2011-08 allows entities to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If a greater than 50 percent likelihood exists that the fair value is less than the carrying amount then a two-step goodwill impairment test as described in Topic 350 must be performed. ASU No. 2011-08 is effective for fiscal years beginning after December 15, 2011, with early adoption permitted. We do not believe that the adoption of ASU No. 2011-08 will have a material impact on our financial statements. Should we perform a qualitative assessment on our goodwill in the future, however, additional disclosures will be required. 

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