UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

SCHEDULE 14A

(Rule 14a-101)

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

(Amendment No.    )

Filed by the Registrant  x                            Filed by a Party other than the Registrant  ¨

Check the appropriate box:

Sunstone Hotel Investors, Inc.

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

Sunstone Hotel Investors, Inc.

120 Vantis, Suite 350

Aliso Viejo, California 92656

Notice of 20112012 Annual Meeting

Renaissance Los Angeles AirportMarriott Quincy Hotel

May 4, 20111, 2012 at 11:30 a.m.2:00 p.m. local time

It is a pleasure to invite you to the 20112012 annual meeting of stockholders of Sunstone Hotel Investors, Inc., or Sunstone, a Maryland corporation, to be held at the Renaissance Los Angeles AirportMarriott Quincy Hotel, located at 1000 Marriott Drive, Quincy, Massachusetts 02169, on Wednesday,Tuesday, May 4, 20111, 2012 at 11:30 a.m.2:00 p.m. local time, for the following purposes:

Only stockholders of record of shares of Sunstone common stock, par value $0.01 per share, and Series C Cumulative Convertible Redeemable Preferred Stock, par value $0.01 per share, at the close of business on March 11, 20119, 2012 are entitled to notice of and to vote at the 20112012 annual meeting or any adjournment or postponement of the meeting.

Whether you own a few or many shares and whether or not you plan to attend in person, it is important that your shares be voted on matters that come before the meeting. You can ensure that your shares are voted at the meeting by submitting your instructions by completing, signing, dating and returning the enclosed proxy card in the envelope provided or, if you own shares through a bank or broker that provides for voting by telephone or over the Internet, by submitting your vote by telephone or over the Internet in accordance with your bank’s or broker’s instructions. If your proxy card is signed and returned without specifying your choices, your shares will be voted on each proposal in accordance with our board’s recommendations.

By Order of the Board of Directors

Kenneth E. Cruse

Lindsay N. Monge

Senior Vice President, Treasurer and Chief Financial OfficerSecretary

March 25, 201123, 2012

Proxy Statement

Table of Contents

IMPORTANT INFORMATION REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE STOCKHOLDER MEETING TO BE HELD ON MAY 4, 20111, 2012

This proxy statement and our Annual Report are available at our Investor Relations website at http://www.sunstonehotels.com/proxy.

Sunstone Hotel Investors, Inc.

120 Vantis, Suite 350

Aliso Viejo, California 92656

Proxy Statement

Your vote is very important. For this reason, our Board of Directors is soliciting the enclosed proxy to allow your shares of common stock, par value $0.01 per share, and Series C Cumulative Convertible Redeemable Preferred Stock, par value $0.01 per share, or Series C preferred stock, to be represented and voted, as you direct, by the proxy holders named in the enclosed proxy card at the 20112012 annual meeting of stockholders of Sunstone Hotel Investors, Inc., a Maryland corporation, to be held on Wednesday,Tuesday, May 4, 2011,1, 2012, at 11:30 a.m.2:00 p.m. local time. “We,” “our,” “the Company” and “Sunstone” refer to Sunstone Hotel Investors, Inc. This proxy statement, the enclosed proxy card and our Annual Report to stockholders for the year ended December 31, 2010,2011, or our Annual Report, are being mailed to stockholders entitled to vote beginning on or about April 4, 2011.March 30, 2012.

Information About the Meeting and Voting

What matters will be voted on at the annual meeting?

The following matters will be voted on at the annual meeting:

With respect to any other matter that properly comes before the meeting or any adjournment or postponement thereof, the representatives holding proxies will vote as recommended by the Board of Directors, or if no recommendation is given, in their own discretion.

Who is entitled to vote?

Stockholders of record of our common stock and Series C preferred stock as of the close of business on March 11, 2011,9, 2012, or the record date, are entitled to vote on matters that properly come before the meeting. Shares of common stock or Series C preferred stock can be voted only if the stockholder is present in person or is represented by proxy. At the close of business on the record date, there were 117,940,756119,108,077 shares of common stock and 4,102,564 shares of Series C preferred stock outstanding and entitled to vote. The holders of common stock and Series C preferred stock will vote together as a single class on all matters that properly come before the meeting.

How many votes do I have?

Each share of common stock has one vote. Each share of Series C preferred stock has one vote for each share of common stock into which it is convertible. As of the record date, each share of Series C preferred stock was convertible into 1.096 shares of common stock and thus has 1.096 votes.

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How do I vote?

You can ensure that your shares are voted at the meeting by submitting your instructions by completing, signing, dating and returning the enclosed proxy form in the envelope provided.

If you own your shares through a bank or broker, you may be eligible to authorize a proxy to vote your shares electronically over the Internet or by telephone. A large number of banks and brokerage firms are participating in the ADP Investor Communication Services, or ADP, online program. This program provides eligible stockholders who receive a paper copy of the Annual Report and proxy statement the opportunity to authorize a proxy to vote via the Internet or by telephone. If your bank or brokerage firm is participating in ADP’s online program, your voting form will provide instructions. Stockholders who authorize a proxy to vote through the Internet or telephone should be aware that they may incur costs to access the Internet, such as usage charges from telephone companies or Internet service providers, and that these costs must be borne by the stockholder. Stockholders who authorize a proxy to vote by Internet or telephone need not return a proxy card by mail. If your voting form does not reference Internet or telephone information, please complete and return the paper proxy card provided by your bank or broker.

If you attend the annual meeting in person, you may request a ballot when you arrive. If your shares are held in the name of your bank, broker or other nominee, prior to attending the meeting you need to request a legal proxy from your bank, broker or nominee as indicated on the back of the Voter Information form you received with your proxy material. The legal proxy must be presented to vote these shares in person at the annual meeting. If you have previously authorized a proxy, you may still vote in person at the annual meeting, which will serve as a revocation of your previous proxy.

Does Sunstone have a policy for confidential voting?

Sunstone has a confidential voting policy. All proxies and other materials, including telephone and Internet proxy authorization, are kept confidential and are not disclosed to third parties. Such voting documents are available for examination by the inspector of election and certain personnel associated with processing proxy cards and tabulating the vote. We plan to appoint one independent inspector of election, a representative of our transfer agent, American Stock Transfer and Trust, to review and confirm the tabulation of votes at the annual meeting.

What if I return my proxy but do not mark it to show how I am voting?

If your proxy card is signed and returned without specifying your choices, your shares will be voted as recommended by the Board of Directors.

What are the Board of Directors’ recommendations?

The Board of Directors recommends that you vote FOR each of the nominees for director; and FOR Proposal 2 to ratify the Audit Committee’s appointment of Ernst & Young LLP to act as the independent registered public accounting firm for the fiscal year ending December 31, 2011;2012; and FOR Proposal 3 to approve, on an advisory basis, the compensation of our named executive officers; and FOR Proposal 4 to approve, on an advisory basis, the holding of an advisory vote on executive compensation every three years.officers.

What vote is required to approve each proposal?

Election of Directors: There is no cumulative voting in the election of directors. The six directors areA director shall be elected by a pluralitymajority of the votes cast with respect to the director at a meeting of stockholders duly called and at which a quorum is present.present; that is, a nominee will be elected as a director only if the number of vote cast “for” such nominee exceeds the number of votes “withheld” with respect to that nominee. Any shares not voted (whether by abstention, “broker non-vote” (i.e., shares held by a broker or nominee which are represented at the meeting, but

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with respect to which such broker or nominee is not instructed to vote and has not voted on a particular proposal), withholding or otherwise) have no effect on the vote.

In any uncontested election of directors (an election in which the number of nominees is the same as the number of directors to be elected), any incumbent director nominee who receives a greater number of votes “withheld” from his or her election than votes “for” such election shall promptly tender his or her resignation to the Board of Directors following the final tabulation of the shareowner vote. The Nominating and Corporate Governance Committee will consider the director’s resignation and will make a recommendation for consideration by the Board of Directors. Within 90 days following the final vote tabulation, the Board of Directors will act on the tendered resignation and the Nominating and Corporate Governance Committee’s recommendation.

Ratification of Appointment of Independent Registered Public Accounting Firm: This proposal requires the affirmative vote of a majority of the votes cast at a meeting duly called and at which a quorum is present. Any shares not voted (whether by abstention, “broker non-vote” or otherwise) have no effect on the vote.

Advisory Vote on Executive Compensation: To approve thisThis proposal requires the affirmative vote of a majority of the votes cast in person or represented by proxy at a meeting duly called and at which a quorum is required. Abstentions will have the same effect as votes against the proposal. Broker non-votes willpresent. Any shares not voted (whether by abstention, “broker non-vote” or otherwise) have no effect on the vote for this proposal. Votes on this proposal are non-binding.

Advisory Vote on Frequency of Advisory Vote on Executive Compensation: The affirmative vote of the holders of a majority in voting power of the shares which are present in person or by proxy and entitled to vote thereon at the annual meeting at which a quorum is present is required for the approval of the vote regarding the frequency of an advisory vote on the compensation of our named executive officers. Abstentions will have the same effect as voting against this proposal. The approval of this proposal is a non-routine proposal on which a broker or other nominee does not have discretion to vote any uninstructed shares. Broker non-votes represent votes not entitled to be cast on the matter and thus will have no effect on the outcome of the say-on-pay vote. With respect to this proposal, if none of the frequency alternatives (1, 2 or 3 years) receives a majority vote, we will consider the frequency that receives the highest number of votes by stockholders to be the frequency that has been selected by our stockholders. However, because this vote is advisory and not binding on us, our Compensation Committee or our Board of Directors in any way, our Compensation Committee and our Board of Directors may decide that it is in our and our stockholders’ best interests to hold an advisory vote on executive compensation more or less frequently than the option approved by our stockholders.

What constitutes a quorum?

The presence of the owners of at least a majority (greater than 50%) of the aggregate number of shares of common stock and Series C preferred stock (calculated on an “as converted to common stock” basis) entitled to vote at the annual meeting constitutes a quorum. Presence may be in person or by proxy. You will be considered part of the quorum if you return a signed and dated proxy card, if you authorize a proxy to vote by telephone or the Internet, or if you attend the annual meeting.

Abstentions and “broker non-votes” are counted as present and entitled to vote for purposes of determining a quorum. A “broker non-vote” occurs when the broker or other entity is unable to vote on a proposal because the proposal is non-routine and the owner does not provide instructions. Rules of the New York Stock Exchange, or NYSE, determine whether proposals presented at stockholder meetings are “routine” or “non-routine.” If a proposal is routine, a broker or other entity holding shares for an owner in street or beneficial name may vote on the proposal without voting instructions from the owner. If a proposal is non-routine, the broker or other entity may vote on the proposal only if the owner has provided voting instructions. The ratification of independent public accountants is generally a routine matter whereas the election of directors is not considered a routine matter. There are no rights of appraisal or similar dissenters’ rights with respect to any matter to be acted upon pursuant to this proxy statement.

What if other items come up at the annual meeting and I am not there to vote?

We are not now aware of any matters to be presented at the annual meeting other than those described in this proxy statement. When you return a signed and dated proxy card or provide your voting instructions by telephone or the Internet, you give the proxy holders (the names of whom are listed on your proxy card) the discretionary authority to vote on your behalf on any other matter that is properly brought before the annual meeting.

Can I change my vote?

You can change your vote by revoking your proxy at any time before it is exercised in one of four ways:

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What does it mean if I receive more than one proxy card?

Some of your shares are likely registered differently or are in more than one account. You should vote each of your accounts by mail, or if such service is provided by a bank or broker that holds your shares, by telephone or the Internet. If you mail proxy cards, please sign, date and return each proxy card to ensure that all of your shares are voted.

If you hold your shares in registered form and wish to combine your stockholder accounts in the future, you should contact our transfer agent, American Stock Transfer and Trust, at 1-800-937-5449. Combining accounts reduces excess printing and mailing costs, resulting in savings for Sunstone that benefit you as a stockholder.

What if I receive only one set of proxy materials although there are multiple stockholders at my address?

If you and other residents at your mailing address own shares in street name, your broker or bank may have sent you a notice that your household will receive only one Annual Report and proxy statement for each company in which you hold shares through that broker or bank. This practice of sending only one copy of proxy materials is known as “householding.” If you did not respond that you did not want to participate in householding, you were deemed to have consented to the process. If the foregoing procedures apply to you, your broker has sent one copy of our Annual Report and proxy statement to your address. You may revoke your consent to householding at any time by contacting your broker or bank. The revocation of your consent to householding will be effective 30 days following its receipt. In any event, if you did not receive an individual copy of this proxy statement or our Annual Report, we will send a copy to you if you address your written request to Sunstone Hotel Investors, Inc., 120 Vantis, Suite 350, Aliso Viejo, California 92656, Attention: Secretary.

How do I submit a stockholder proposal for inclusion in the proxy statement for next year’s annual meeting?

Stockholder proposals may be submitted for inclusion in our 20122013 annual meeting proxy statement after the 20112012 annual meeting, but must be received no later than December 6, 2011.November 30, 2012. Proposals should be sent via registered, certified, or express mail to: Lindsay N. Monge, Treasurer and Secretary, Sunstone Hotel Investors, Inc., 120 Vantis, Suite 350, Aliso Viejo, California 92656. See also “Stockholder Proposals for the 20122013 Annual Meeting” later in this proxy statement.

What do I need to do to attend the annual meeting?

If you are a holder of record, you should indicate on your proxy card that you plan to attend the meeting by marking the box on the proxy card provided for that purpose.

For the safety and comfort of our stockholders, admission to the annual meeting will be restricted to:

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Please note that space limitations may make it necessary to limit attendance. Admission to the meeting will be on a first-come, first-served basis. No more than two representatives of any corporate or institutional stockholder will be admitted to the meeting.

You may obtain directions to the Renaissance Los Angeles AirportMarriott Quincy Hotel in the Investor Relations section of our website at www.sunstonehotels.com or by calling us at 949-382-3091.949-382-3036.

If you attend the meeting, you may be asked to present valid government-issued photo identification, such as a driver’s license or passport, before being admitted. Cameras, recording devices, and other electronic devices will not be permitted, and attendees may be subject to security inspections or other security precautions.

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Proposal 1:

Election of Directors

Board of Directors

The business and affairs of Sunstone are managed under the direction of our Board of Directors. Our Board of Directors has responsibility for establishing broad corporate policies and for the overall performance of Sunstone, rather than for day-to-day operating details. Our Board of Directors currently consists of six directors.nine directors, of which all but Robert A. Alter will stand for re-election at the 2012 annual meeting.

The proxy holders named on the proxy card intend to vote for the election of the sixeight nominees listed below. The Nominating and Corporate Governance Committee selected these nominees, which selection was ratified by the Board of Directors. If you do not wish your shares to be voted for particular nominees, please identify the exceptions in the designated space provided on the proxy card or, if your shares are held through a bank or broker and you are authorizing a proxy to vote by telephone or the Internet, follow the instructions provided when you access the telephone or Internet proxy facilities. Directors will be elected by a pluralitymajority of the votes cast. Any votes that are withheld and any shares not voted, whether by abstention, “broker non-vote” or otherwise, will have no impact on the vote.

If at the time of the meeting one or more of the nominees have become unable to serve, shares represented by proxies will be voted for the remaining nominees and for any substitute nominee or nominees designated by the Nominating and Corporate Governance Committee. If one or more nominees have become unable to serve, the Board of Directors may, in accordance with our bylaws, reduce the size of the Board of Directors or may leave a vacancy until a nominee is identified. Each of the nominees has consented to act as a director if duly elected and qualified and the Nominating and Corporate Governance Committee knows of no reason why any of the nominees will be unable to serve.

Directors elected at the annual meeting will hold office until the next annual meeting and until their successors have been elected and qualified. For each nominee, there follows a brief listing of principal occupation for at least the past five years, other major affiliations, and age as of February 17, 2011.16, 2012. Each of the nominees is currently a director of the Company.

Nominees for Election as Directors

Mr. AlterBatinovich has served as our Chief Executive Officer, or CEO, from our formation through March 19, 2007, when he became our Executive Chairman. On March 4, 2008, the Board of Directors appointeda director since November 7, 2011. Mr. Alter our interim CEO, effective March 21, 2008,Batinovich currently serves as President and Mr. Alter’s position as interim CEO concluded on January 22, 2009. Mr. Alter continues to serve as our Executive Chairman. Prior to our formation, Mr. Alter served from November 1999 through our initial public offering in 2004 as Chief Executive Officer of oneGlenborough, LLC, a privately held full service real estate investment and management company focused on the acquisition, management and leasing of our predecessor companiesinstitutional quality commercial properties. In 2010, Mr. Batinovich led a private investor group in acquiring Glenborough, LLC and related real estate assets that were originally part of Glenborough Realty Trust, a NYSE listed REIT, which was sold to affiliates of Morgan Stanley in 2006. From December 2006 to October 2010, Mr. Batinovich served as President and Chief Executive Officer of Glenborough, LLC, a company formed by an affiliate of Morgan Stanley to acquire Glenborough Realty Trust. In connection with the 2006 transaction, Mr. Batinovich and the Glenborough Realty Trust senior management team were retained to operate the new private entity, and the team remains together in 1985, which becamethe newly re-acquired Glenborough, LLC. In 1996 Mr. Batinovich co-founded Glenborough Realty Trust and was President and Chief Executive Officer and a public company in August 1995. The public company, Sunstone Hotel Investors, Inc., commenced doing business in August 1995 upon its initial public offering. In November 1999, Mr. Alter participated in a management-led buyout to take that company private. He has been an owner of hotels since 1976, is a past presidentdirector at the time of the Holiday Inn Franchise Associationsale in 2006. Mr. Batinovich was appointed President of Glenborough Realty Trust in 1997 and Chief Executive Officer in 2003. He also served as Chief Operating Officer and Chief Financial Operator during his tenure at Glenborough Realty Trust. Prior to founding Glenborough Realty Trust, Mr. Batinovich served as Chief Operating Officer and Chief Financial Officer of Glenborough Corporation until 1996 when it was merged into Glenborough Realty

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Trust. Glenborough Corporation was a past memberprivate real estate investment and management company that completed a number of the Marriott Franchise boardprivate placements of office, industrial, residential and hotel properties. Prior to joining Glenborough Corporation in 1983, Mr. Batinovich was an officer of Security Pacific National Bank. Mr. Batinovich is a member of YPO/WPO, a memberthe Building Owners and Managers Association (BOMA), the Association of theForeign Investors in Real Estate Roundtable(AFIRE) and former Chairman of the Governmental Affairs Committeeother trade associations. He also serves as a trustee of the American Hotel & Lodging Association.University of Paris. Mr. Alter holdsBatinovich has a B.S. degreeB.A. in HotelInternational Business Administration from the Cornell SchoolAmerican University of Hotel Administration.Paris.

The following experience, qualifications, attributes and/or skills led our Board of Directors to conclude that Mr. AlterBatinovich should serve as a director: his professional background and experience, education, previously held

chief executive senior-executive level position at the Company, intimate knowledge of the Company’s hotels, relationships within the hospitality industry, prior Companypositions, other public company board experience, and his extensive background and experience with REITs and his background and experience in hotels, finance and real estate development.and finance transactions.

Ms. Behar has served as a director since October 26, 2004. Since October 2005, Ms. Behar has been Managing Director, Real Estate & Alternative Investments, for General Motors Investment Management Corporation, or GMIMCO. From 1986 through October 2005, Ms. Behar was a Portfolio Manager with GMIMCO. She manages GMIMCO’s clients’ real estate investment portfolios, including both private market and publicly traded security investments, as well as their alternative investment portfolios, totaling approximately $8.5$8.7 billion. She is a member of GMIMCO’s Management Committee, Investment Committee and Investment Review and Approval Committee. Ms. Behar is a member of the Board of Directors of Desarrolladora Homex, S.A. de C.V., a publicly listed home development company located in Mexico (and for which she also serves on the audit committee),. She also serves as a member of the Board of Directors of the Pension Real Estate Association, and serves on the advisory boards of several domestic and international private real estate investment entities. Ms. Behar holds a B.S.E. degree from The Wharton School of the University of Pennsylvania, an M.B.A. degree from the Columbia University Graduate School of Business and the CFA charter.

The following experience, qualifications, attributes and/or skills led our Board of Directors to conclude that Ms. Behar should serve as a director: her professional background and experience, extensive education, current and previously held senior-executive level positions, other company board experience, prior Company board experience, domestic and international real estate knowledge, and her extensive experience in investments in hotels and real estate in general.

Mr. Cruse has served as our President and Chief Executive Officer and as a director since August 5, 2011. Mr. Cruse joined us in April 2005 as Senior Vice President—Asset Management, and was appointed Senior Vice President—Corporate Finance on September 1, 2006, Senior Vice President and Chief Financial Officer on January 1, 2007, Executive Vice President and Chief Financial Officer on February 18, 2010, President and Chief Financial Officer on December 17, 2010 and as President and Chief Executive Officer and a director on August 5, 2011. Since December 2007, Mr. Cruse has been a director of BuyEfficient, LLC, a subsidiary of the Company. For the eight years prior to joining Sunstone, Mr. Cruse worked in a variety of roles for Host Marriott Corporation, the predecessor of Host Hotels and Resorts, Inc., most recently as Vice President, Corporate Finance. Prior to working for Host Marriott Corporation, Mr. Cruse held various corporate positions with Marriott International, Inc. Mr. Cruse started his hotel career in 1991, working various management-level operating positions at the Marco Island Hilton. Mr. Cruse holds a B.S. degree from Colorado State University and an M.B.A. degree from Georgetown University.

The following experience, qualifications, attributes and/or skills led our Board of Directors to conclude that Mr. Cruse should serve as a director: his professional background and experience, extensive education, current and previously held senior-executive level positions within the Company, intimate knowledge of the Company’s hotels, employees, processes and controls, relationships among the hospitality industry and his extensive background and experience in hotel and finance transactions.

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Mr. Lewis has served as a director since May 2, 2006. Mr. Lewis is Chief Executive Officer of Realty Income Corporation, a NYSE-listed real estate investment trust. Mr. Lewis is also Vice Chairman of the Board of Directors of Realty Income Corporation and has been a member of its Board of Directors since September 1993. He also serves as a director of Crest Net Lease, Inc., a subsidiary of Realty Income Corporation. He joined Realty Income Corporation in 1987 and served in a variety of executive positions, including Senior Vice President, Capital Markets until 1997, when he was named Chief Executive Officer. In 2000 and 2001 he also held the position of President. Prior to joining Realty Income Corporation, he was an executive with Johnstown Capital, a real estate investment company (1982 to 1987), an investment specialist with Sutro & Co., Inc. (1979-(1979 to 1982), and in marketing with Procter & Gamble (1974 to 1979). Mr. Lewis has more than 20 years of experience directing public and private capital market transactions. Mr. Lewis holds a B.A. degree in Business Administration from Chaminade University of Hawaii.

The following experience, qualifications, attributes and/or skills led our Board of Directors to conclude that Mr. Lewis should serve as a director: his professional background and experience, education, previously held senior-executive level positions, other public company board experience, prior Company board experience, his extensive background and experience with REITs and his background and experience in real estate and finance transactions.

Mr. Locker has served as our Non-Executive Chairman since November 7, 2011, and as a director since May 2, 2006. Since May 2003, Mr. Locker has been President of Inlet Capital LLC, or Inlet, an investment and asset management firm focused on the commercial real estate industry; President of Global Capital Resources LLC and GCR Advisors Inc. (both affiliates of Inlet), which companies together are the Co-General Partner and Co- Advisor,Co-Advisor, respectively, to the NYLIM-GCR Fund-1 2002 L.P., which provides fixed and variable rate senior and subordinate mortgages; and President and Managing Member of COP Holdings, LLC (an affiliate of Inlet), an investment firm focused on factory retail outlet centers.

Furthermore, Mr. Locker has been a director of IVP Securities, LLC since March 2004. From December 2006-2007,2006 to 2007, Mr. Locker was a director of The Mills Corporation, a publicly traded retail mall REIT, where he was chairman of the compensation committee. From May 2005 to January 2007, he served as a director of Glenborough Realty Trust, a publicly traded office REIT, where he was a member of the audit and compensation committees until sale of the company to Morgan Stanley. Mr. Locker was previously a Managing Director in the Real Estate Investment Banking Group at Deutsche Bank Securities, Inc. from September 2000 to February 2003. Prior to joining Deutsche Bank in 2000, Mr. Locker was Senior Managing Director at Bear, Stearns & Co. Inc., responsible for Real Estate Investment Banking. Mr. Locker has more than 2829 years of major national market experience in real estate finance, private placement, capital markets and transaction structuring and risk management. Mr. Locker earned a B.S./B.A. from Boston University School of Management in 1983 and an M.B.A. from the Wharton School in 1988. Mr. Locker is Trustee of National Jewish Health, and is a member of NAREIT, Urban Land Institute, Commercial Mortgage Securities Association, International Council of Shopping Centers, The Wharton School Zell-Lurie Real Estate Center, Fisher Center for Real Estate and Urban Economics and numerous philanthropic and community organizations.

The following experience, qualifications, attributes and/or skills led our Board of Directors to conclude that Mr. Locker should serve as a director: his professional background and experience, extensive education, previously held senior-executive level positions, other public company board experience, prior Company board experience, and his extensive finance and accounting and real estate investment and asset management experience.

Mr. Pasquale has served as a director since November 7, 2011. Mr. Pasquale currently serves as a director of Ventas, Inc. (“Ventas”). Mr. Pasquale joined Ventas as Senior Advisor in 2011, upon closing of Ventas’ acquisition of Nationwide Health Properties, Inc. (formerly NYSE: NHP) (“NHP”). He served as Chairman of

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the Board of NHP from 2009 to 2011, as President and Chief Executive Officer of NHP from 2004 to 2011, and served as Executive Vice President and Chief Operating Officer of NHP in 2003. Mr. Pasquale was a director of NHP from 2003 to 2011. Mr. Pasquale previously served in various roles (most recently Chairman and Chief Executive Officer) at ARV Assisted Living, Inc., an operator of assisted living facilities, from 1998 to 2003 and concurrently as President and Chief Executive Officer of Atria Senior Living Group, Inc. from April 2003 to September 2003. Mr. Pasquale also served as President and Chief Executive Officer of Richfield Hospitality Services, Inc. and Regal Hotels International-North America, a hotel ownership and management company, from 1996 to 1998, and as its Chief Financial Officer from 1994 to 1996. Mr. Pasquale is a member of the Executive Board of the American Seniors Housing Association (ASHA), a director of Alexander & Baldwin, Inc. (NYSE: ALEX), a Honolulu-headquartered ocean transportation, real estate and agribusiness company (for which he also serves as chair of the audit committee and a member of the nominating and governance committee), Matson Navigation Company, Inc. (a subsidiary of Alexander & Baldwin, Inc.), and Terreno Realty Corporation (NYSE:TRNO), an industrial REIT with a strategic focus in six coastal U.S. markets (for which he also serves as lead independent director and a member of the audit, compensation and nominating and governance committees), and a member of the Board of Trustees of the Newport Harbor Nautical Museum. Mr. Pasquale received his B.S. in Accounting,summa cum laude, and his M.B.A. from the University of Colorado.

The following experience, qualifications, attributes and/or skills led our Board of Directors to conclude that Mr. Pasquale should serve as a director: his professional background and experience, extensive education, previously held senior-executive level positions, other public company board experience, his extensive background and experience with REITs and his background and experience in real estate and finance transactions.

Mr. Russell has served as a director since October 26, 2004. Since June 2001, Mr. Russell has been President of Russell Financial, Inc., a strategic and financial consulting firm serving businesses and high net worth individuals. Mr. Russell is retired as the Chairman of Mellon West and the Vice Chairman of Mellon Financial Corporation, in which capacities he served from May 1996 until March 2001. From September 1991 through April 1996, Mr. Russell served in various positions at Mellon, including Vice Chairman and Chief Risk Officer of Mellon Bank Corporation and Chairman of Mellon Bank Corporation’s Credit Policy Committee. From 1983 to 1991, Mr. Russell served as President and Chief Operating Officer, and a director, of Glenfed/Glendale Federal Bank. Mr. Russell also serves on the Board of Directors of Hawaiian Electric Industries (NYSE:HE), where he serves as a member of the audit committee, and serves on the Board of Directors of American Savings’ Bank, a subsidiary of Hawaiian Electric Industries, where he serves as chair of the risk committee and a member of the audit committee. From 2002 to 2011, Mr. Russell was a director of Nationwide Health Properties, Inc. (for which he also servesserved as chair of the audit committee and a member of the nominating and governance committee). From 2003 to 2008, Mr. Russell was a director of Countrywide Financial Corporation, where he was a member of the audit and ethics, credit, finance and special oversight committees. From 2002 to 2008 Mr. Russell was a director of Countrywide Bank (private) and from 2001 to 2007 he was a member of the UCLA Anderson Board of Visitors (non-profit). Mr. Russell has been a panelist at various conferences and seminars, addressing topics such as corporate governance and audit committee role. Mr. Russell holds a B.A. degree in Economics from the University of Washington and an M.A. degree in Economics from Northwestern University.

The following experience, qualifications, attributes and/or skills led our Board of Directors to conclude that Mr. Russell should serve as a director: his professional background and experience, extensive education, previously held senior-executive level positions, other public company board experience, prior Company board experience, his extensive experience in corporate risk, accounting and finance and general investment experience.

Mr. Wolff has served as our Chairmana director since October 26, 2004. He was our Chairman from October 26, 2004 to March 18, 2007 and sincewas Co-Chairman from March 19, 2007 he has served as our Co-Chairman.to November 6, 2011. Mr. Wolff has been Chairman of Wolff Urban Management, Inc. since 1980 and is also its Chief Executive Officer. Wolff Urban

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Management, Inc. is a real estate acquisition, investment, development and management firm. Mr. Wolff is also a co-founder of Maritz, Wolff & Co., a privately held hotel investment group that owns top-tier luxury hotels. In 2007, Mr. Wolff was also named Chairman and Chief Executive Officer of Wolff Urban Development, LLC, a private real estate and select business investment opportunity organization that invests in and develops commercial urban real estate, professional sports activities, luxury hotel

and resort properties, hotel management companies and hospitality related assets. From December 2005 to September 2007, Mr. Wolff was a director of Maguire Properties, Inc. From 1999 to 2004, Mr. Wolff also served as Co-Chairman of Fairmont Hotels & Resorts, a hotel management company formed by Fairmont Hotel Management Company and Canadian Pacific Hotels & Resorts, Inc. In addition, Mr. Wolff acquired ownership of Major League Baseball’s Oakland Athletics in April 2005. Mr. Wolff also serves on the board of Bobrick Washroom Equipment, Inc., as well as First Century Bank. Mr. Wolff holds a B.A. degree in Business Administration from the University of Wisconsin, Madison, and an M.B.A. degree from Washington University in St. Louis, Missouri.

The following experience, qualifications, attributes and/or skills led the Board to conclude that Mr. Wolff should serve as a director: his professional background and experience, extensive education, previously held senior-executive level positions, other company board experience, prior Company board experience, his entrepreneurial character, and his extensive background and experience in hotel and other commercial real estate transactions, development and management.

The Board of Directors recommends a vote FOR each of the nominees.

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Proposal 2:

Ratification of the Audit Committee’s Appointment of

Independent Registered Public Accounting Firm

The Audit Committee has selected and appointed the firm of Ernst & Young LLP to act as our independent registered public accounting firm for the year ending December 31, 2011.2012. Ernst & Young LLP has audited the financial statements for us for the years ended December 31, 2010, 2009, 2008, 2007, 2006 and 2005 and for the periodsince our initial public offering on October 26, 2004 through December 31, 2004 and for our predecessor for the period January 1, 2004 through October 25, 2004 and for the year ended December 31, 2003.2004. Ratification of the appointment of Ernst & Young LLP requires a majority of the votes cast. Any shares not voted, whether by abstention, “broker non-vote” or otherwise, have no impact on the vote.

Although stockholder ratification of the appointment of our independent auditor is not required by our bylaws or otherwise, we are submitting the selection of Ernst & Young LLP to our stockholders for ratification as a matter of good corporate governance practice. Even if the selection is ratified, the Audit Committee in its discretion may select a different independent registered public accounting firm at any time if it determines that such a change would be in the best interests of Sunstone. If our stockholders do not ratify the Audit Committee’s selection, the Audit Committee will take that fact into consideration, together with such other factors it deems relevant, in determining its next selection of our independent registered public accounting firm.

Representatives of Ernst & Young LLP are expected to be present at the annual meeting. These representatives will have an opportunity to make a statement if they so desire and will be available to respond to appropriate questions.

Audit, Audit-Related, Tax and Other Fees

The aggregate fees billed for professional services provided by Ernst & Young LLP for 20102011 and 20092010 were as follows:

In the above table, in accordance with the definitions of the Securities and Exchange Commission, or the SEC, “audit fees” are fees paid by us to Ernst & Young LLP for the audit of our consolidated financial statements included in our annual report on Form 10-K and review of the unaudited financial statements included in our quarterly reports on Form 10-Q or for services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements, including in connection with public offerings of securities. “Audit fees” also include fees paid by us to Ernst & Young LLP for the audit of our internal control over financial reporting. In 2011, audit fees consisted primarily of $735,000 for the full-year audit, quarterly reviews and the audit of our internal control over financial reporting and $95,420 for services related to statutory and regulatory filings and public offerings. In 2010, audit fees consisted primarily of $691,000 for the full-year audit, quarterly reviews and the audit of our internal control over financial reporting and $233,064 for services related to statutory and regulatory filings and public offerings. In 2009, audit fees consisted primarily of $631,281 for the full-year audit, quarterly reviews and the audit of our internal control over financial reporting and $151,531 for services related to public offerings.

“Audit-related Fees” are fees billed by Ernst & Young LLP for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements. In 2011, audit-related fees of $100,000 consisted of a ground lease compliance report on one hotel, a partnership audit on one hotel and a SEC XBRL (Extensible Business Reporting Language) compliance assessment. In 2010, audit-related fees of $20,000 consisted of a ground lease compliance report on one hotel. In 2009, there were zero audit-related fees.

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“Tax Fees” are fees billed by Ernst & Young LLP that relate to tax consulting and advisory services.

“Other Fees” are fees billed by Ernst & Young LLP to us for any services not included in the first three categories.

Pre-approval Policies and Procedures

Our Audit Committee has adopted a pre-approval policy requiring that the Audit Committee pre-approve all audit and permissible non-audit services to be performed by Ernst & Young LLP. Any proposed service that has received pre-approval but which will exceed pre-approved cost limits will require separate pre-approval by the Audit Committee. The Audit Committee has delegated to its chair the authority to grant the required approvals for all audit and permissible non-audit services to be performed by Ernst & Young LLP, that do not exceed $75,000 for any one project, provided that the chair reports the details of the exercise of any such delegated authority at the next meeting of the Audit Committee. All services performed by the independent registered public accounting firm in 20102011 were approved by the Audit Committee pursuant to its pre-approval policy.

The Board of Directors recommends a vote FOR ratification of the appointment of Ernst & Young LLP.

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Proposal 3:

Advisory Vote (Non-Binding) on Executive Compensation

At the meeting, the stockholders will vote on a non-binding, advisory resolution regarding the compensationSection 14A of the Company’s named executive officers listed inExchange Act, as enacted as part of the Summary Compensation Table below under the heading “Executive Officer Compensation—Summary Compensation Table,” or the Named Executive Officers.

We believe that our compensation policies and procedures are competitive, focused on pay-for-performance and strongly aligned with the long-term interests of our stockholders. This advisory stockholder vote (required under the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act in July 2010, or the Dodd-Frank Act, requires us to submit to our stockholders a non-binding advisory resolution to approve the compensation of 2010,the “Named Executive Officers” listed in the Summary Compensation Table of this proxy statement, commonly known as “say-on-pay”) gives youreferred to as a stockholder the opportunity to endorse or not endorse“say-on-pay” vote. In May 2011, we held our first “say-on-pay” vote, and our stockholders approved the compensation we payof our Named Executive Officers through voting for or against2011 named executive officers, with approximately 76% of stockholder votes cast in favor of our 2011 “say-on-pay resolution” (excluding abstentions and broker non-votes). In response to stockholder preferences, the Board of Directors determined that the Company will hold an annual advisory stockholder vote on the compensation of our named executive officers.

Accordingly, the Board of Directors has approved the submission of the following resolution:resolution to the Company’s stockholders for approval at the 2012 annual meeting:

“Resolved, that the stockholders hereby approve, on an advisory basis, the compensation of the Company’s named executive officers as disclosed in the Company’s 20112012 proxy statement pursuant to the disclosure rules of the Securities and Exchange Commission (which disclosure includes the Compensation Discussion and Analysis, the Summary Compensation Table and the other executive compensation tables and related discussion).”

The Company andAs described more fully in the Compensation Committee remain committed to the compensation philosophy, policies and objectives outlined under the heading “Executive Officer Compensation—Compensation Discussion and Analysis” in this proxy statement. As always, the compensation committee will continue to review all elements of the executive compensation program and take any steps it deems necessary to continue to fulfill the objectives of the program.

Stockholders are encouraged to carefully review the “Executive Officer Compensation—Compensation“Compensation Discussion and Analysis” section of this proxy statement, for a detailed discussion of the Company’s executive compensation program.program is designed to attract, motivate and retain talented executives through competitive compensation arrangements that, within appropriate risk parameters, provide strong financial incentives for the executive officers to maximize stockholder value. The compensation program is designed to achieve these objectives through a combination of the following types of compensation: base salary, annual cash incentive bonus awards and equity incentive awards. Base salary is intended to provide a baseline level of compensation for our Named Executive Officers. The remaining types of compensation, which in the aggregate represent the majority of our Named Executive Officers’ target total compensation opportunities, tie compensation directly to the achievement of corporate and individual objectives.

Because yourRequired Vote

The affirmative vote of a majority of the votes cast will be required to approve the compensation of the Named Executive Officers as disclosed in this proxy statement.

The stockholder vote on executive compensation is an advisory vote only, and it willis not be binding uponon the Company, the Board of Directors or the Compensation Committee. Although the vote is non-binding, the Compensation Committee orand the Board of Directors. However,Directors value the Compensation Committeeopinions of the stockholders and will take into accountconsider the outcome of the vote when consideringmaking future executive compensation arrangements. Additionally, your advisory vote will not be construed (i) to overrule a decision by the Company, the Compensation Committee ordecisions.

Recommendation of the Board of Directors (ii) to create or imply any change to the fiduciary duties of the Company, the Compensation Committee or the Board or Directors, (iii) to create or imply any additional fiduciary duties for the Company, the Compensation Committee or the Board of Directors, or (iv) to restrict or limit the ability of shareholders to make proposals for inclusion in proxy materials related to executive compensation.

The Board of Directors recommends a vote FOR the approval of Sunstone’s executivethe compensation programs,of the Named Executive Officers as describeddisclosed in this proxy statement.

Proposal 4:

Advisory Vote (Non-Binding) on the Frequency of Holding an Advisory Vote on Executive Compensation13

At the annual meeting, the stockholders will vote on a non-binding, advisory proposal regarding the frequency of the advisory stockholder vote on executive compensation discussed in Proposal 3 in this proxy statement. Stockholders will have the opportunity to cast an advisory vote on whether the stockholder vote on executive compensation should occur every 1, 2 or 3 years. Stockholders may also abstain from voting on the matter.

Because your vote is advisory, it will not be binding upon the Company, the Compensation Committee or the Board of Directors. However, the Compensation Committee and the Board of Directors will take into account the outcome of the vote when considering the frequency of the advisory stockholder vote on executive compensation. Additionally, your advisory vote will not be construed (i) to overrule a decision by the Company, the Compensation Committee or the Board of Directors, (ii) to create or imply any change to the fiduciary duties of the Company, the Compensation Committee or the Board of Directors, (iii) to create or imply any additional fiduciary duties for the Company, the Compensation Committee or the Board of Directors, or (iv) to restrict or limit the ability of shareholders to make proposals for inclusion in proxy materials related to executive compensation.

The Board of Directors recommends a vote FOR three-year intervals to support the long-term focus of the executive compensation program and allow for thoughtful implementation of changes when needed.

We emphasize, however, that you are not voting to approve or disapprove the Board of Directors’ recommendation. Instead, your proxy card provides you with 4 options regarding this non-binding, advisory proposal. You may cast an advisory vote for the stockholder vote on executive compensation to occur every 1, 2 or 3 years, or you may abstain from voting on the matter.

Corporate Governance

In light of applicable legal requirements, such as the Sarbanes-Oxley Act of 2002 and related rules promulgated by both the NYSE and the SEC, we provide the following discussion to inform you of our efforts to assure that we employ best practices in our corporate governance. A copy of our Corporate Governance Guidelines is available in the Investor Relations section of our website at www.sunstonehotels.com. In addition, a printed copy of the Corporate Governance Guidelines will be provided without charge upon request to Sunstone Hotel Investors, Inc., 120 Vantis, Suite 350, Aliso Viejo, California 92656, Attention: Secretary.

We have also established conflict of interest and other policies to serve the long-term interests of our stockholders and further align the interests of our directors and management with our stockholders.

Conflict of Interest Policy

We have adopted a policy which provides that the approval of our Nominating and Corporate Governance Committee is required for any transaction involving us and any of our directors, officers or employees, or any entity in which any of our directors, officers or employees is employed or has an interest of more than 5%.

Code of Business Conduct and Ethics

We have adopted a Code of Business Conduct and Ethics, which provides that directors, officers and employees owe a duty to us to advance our business interests when the opportunity to do so arises. Among other things, our directors, officers and employees are prohibited from taking (or directing to a third party) a business opportunity that is discovered through the use of corporate property, information or position, unless we have already been offered the opportunity and turned it down, in which case our Nominating and Corporate Governance Committee must in any event approve the director, officer or employee interest therein. More generally, our directors, officers and employees are prohibited from using corporate property, information or position for personal gain. The Code of Business Conduct and Ethics is posted in the Investor Relations section of our website at www.sunstonehotels.com. In addition, a copy of the Code of Business Conduct and Ethics will be provided without charge upon request to Sunstone Hotel Investors, Inc., 120 Vantis, Suite 350, Aliso Viejo, California 92656, Attention: Secretary.

Independence of Directors and Committees

The Board of Directors has determined that a majority of the current Board of Directors is independent as defined under the NYSE’s rules and that a majority of the Board of Directors will be independent if the slate of directors up for election in Proposal 1 of this proxy statement are elected. Directors who serve on the Compensation Committee and the Nominating and Corporate Governance Committee are also subject to these independence requirements. Directors who serve on the Audit Committee are subject to these and additional independence requirements.

To be considered independent under the NYSE’s rules, the Board of Directors must determine that a director does not have a material relationship with Sunstone and/or its consolidated subsidiaries (either directly or as a partner, stockholder or officer of an organization that has a relationship with any of those entities).

The Board of Directors undertook a review of the independence of the directors nominated for election at the upcoming annual meeting. During this review, the Board of Directors considered the transactions and relationships during the prior three years between each director or any member of his or her immediate family and Sunstone and its subsidiaries and affiliates as reported under “Certain Relationships and Related Transactions” below. The Board of Directors also examined transactions and relationships between directors or their affiliates and members of the senior management or their affiliates. The purpose of this review was to determine whether any such relationships or transactions were inconsistent with a determination that such director is independent.

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As a result of this review, the Board of Directors affirmatively determined that Messrs. Batinovich, Lewis, Locker, Pasquale, Russell and Wolff and Ms. Behar are independent of Sunstone and its management under the independence standards of the NYSE.

The Board of Directors Leadership Structure

Mr. AlterLocker serves as our ExecutiveNon-Executive Chairman Mr. Wolff as our non-executive Co-Chairman and Mr. Cruse as our President and principal executive officer. We believe this board leadership structure is best for the CompanyChief Executive Officer and our stockholders, asa director. Mr. Alter dividesserves as our Chairman Emeritus and Founder. Effective November 7, 2011, Mr. Alter resigned from his timeposition as neededExecutive Chairman. Further, Mr. Alter is not standing for re-election at the 2012 annual meeting; and, assuming that the nominees listed in Proposal 1 are elected as directors at the 2012 annual meeting, Mr. Locker will continue to assist Mr. Wolff with board mattersserve as our Non-Executive Chairman and Mr. Cruse with management matters. During 2011, Mr. Alter is dedicating additional time to assist with management matters, including Mr. Cruse’s transition. During this transition process, Mr. Alter and Mr. Cruse will effectively serve as a joint leaders of the Company.

We believe our President and Chief Executive Officer and a director.

Since October 26, 2004, the roles of chairman and chief executive officer have been held separately. Though the Board of Directors does not have a policy as to whether the chairman should be an independent director, an affiliated director, or a member of management, when the chairman is an affiliated director or a member of Company management, or when the independent directors determine that it is in the best interests of the Company, the independent directors will annually appoint from among themselves an independent co-chairman or lead independent director (consistent with our bylaws and our corporate governance guidelines). For instance, Mr. Wolff served as our independent Co-Chairman from March 19, 2007 to November 7, 2011, during which period Mr. Alter served as our Executive Chairman.

The role of the Non-Executive Chairman is to coordinate the activities of the independent directors, coordinate with the Chief Executive Officer and Co-Chairman have an excellent working relationship that will ultimately allow Mr. Crusecorporate secretary to make an appropriate transition. By dividingset the chairmanagenda for Board of Directors’ meetings, chair executive sessions of the independent directors, provide leadership to the Board of Directors and President roles, we ensure there is no duplicationuphold high corporate governance and ethical standards, communicate effectively with management on a regular basis, provide support and advice to the Chief Executive Officer, facilitate communication between and among the independent directors and management, take a lead role in the Board of effort betweenDirector’s self-assessment and evaluation processes, and perform the respective positions. We believe this provides strong leadership forother duties either specified in the corporate governance guidelines or assigned from time to time by the Board of Directors.

Furthermore, our Board of Directors while also positioningcurrently has seven independent members and two non-independent members, Messrs. Alter and Cruse. Given that Mr. Alter is not standing for election at the 2012 annual meeting and assuming that the nominees listed in Proposal 1 are elected as directors at the 2012 annual meeting, our President as the leader of the Company in the eyes of our employees and our stockholders.

Our Board of Directors has fivewill have seven independent members and one non-independent member, the Executive Chairman.Mr. Cruse. A number of the members of our Board of Directors are currently serving or have served as members of senior management of other public companies and have served as directors of other public companies. We have threefour board committees comprised solely of independent directors. We believe that

Our Board of Directors believes its leadership structure is appropriate because it effectively allocates authority, responsibility and oversight between management and the numberindependent members of independent, experienced directors that make up our Board of Directors, along withDirectors. It does this by giving primary responsibility for the operational leadership and strategic direction of the Company to our Chief Executive Officer, while enabling our Non-Executive Chairman to facilitate our Board of Directors’ independent oversight of the Board of Directors by the non-executive Co-Chairman, provides our management, with appropriate oversight, leadership and guidance.

Pursuant to our bylawspromote communication between management and our Board, and support our Board’s consideration of key governance guidelines, our Board of Directors determines the best board leadership structure for the Company from time to time. As part of our annual board self-evaluation process, we evaluate our leadership structure to ensure that the Board of Directors continues to believe that it provides the optimal structure for the Company and stockholders. While we recognize that different board leadership structures may be appropriate for companies in different situations, we believe our current leadership structure, with Mr. Cruse serving as President and principal executive officer, Mr. Alter as Executive Chairman and Mr.  Wolff as Co-Chairman, is the optimal structure for the Company at this time.matters.

Risk Oversight

Our Compensation Committee oversees risk management as it relates to our compensation plans, policies and procedures and has met with management to review whether our compensation programs may create incentives to our employees to take excessive or inappropriate risks that could have a material adverse affect on the Company. We believe that features of our programs, including the mix of long- and short-term incentives and equity grants, as well as our internal financial and legal controls appropriately mitigate the risk of an employee taking action that harms the Company for short-term compensation benefits for the employee.

Our Audit Committee is primarily responsible for overseeing the Company’s risk management processes on behalf of the full Board of Directors. The Audit Committee receives reports from management at least quarterly regarding the Company’s assessment of risks. In addition, the Audit Committee reports regularly to the full

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Board of Directors, which also considers the Company’s risk profile. The Audit Committee and the full Board of Directors focus on the most significant risks facing the Company and the Company’s general risk management strategy, and also ensure that risks undertaken by the Company are consistent with the Board of Directors’

appetite for risk. While the Board of Directors oversees the Company’s risk management, Company management is responsible for day-to-day risk management processes. We believe this division of responsibilities is the most effective approach for addressing the risks facing the Company and that the Board of Directors leadership structure supports this approach.

Our Compensation Committee oversees risk management as it relates to our compensation plans, policies and procedures and has met with management to review whether our compensation programs may create incentives to our employees to take excessive or inappropriate risks that could have a material adverse effect on the Company. We believe that features of our programs, including the mix of long- and short-term incentives and equity grants, as well as our internal financial and legal controls, appropriately mitigate the risk of an employee taking action that harms the Company for short-term compensation benefits for the employee.

Director Attendance at Meetings

Each of our directors is expected to attend each annual meeting of stockholders. Although our Boardstockholders and all meetings of Directors recognizes that conflicts may occasionally prevent a director from attending a Board of Directors or stockholder meeting, the Board of Directors expects each director to make every possible effort to keep such absences to a minimum.Directors. The Board of Directors held fifteeneleven meetings and acted by written consent on fourfifteen occasions in 2010.2011. During that period, all directors attended at least 75% of the aggregate of the meetings of the Board of Directors and all committees of the Board of Directors on which they served during the periods in which they served. In addition, all of our directors attended our annual meeting of stockholders in 2010.2011.

Stockholder Communication with the Board of Directors and Non-Employee Directors

Stockholders may communicate any matters they wish to raise with the directors by writing to the Board of Directors, Sunstone Hotel Investors, Inc., 120 Vantis, Suite 350, Aliso Viejo, California 92656, Attention: Secretary. Stockholders should provide proof of stock ownership with their correspondence. All communications from verified stockholders will be received and processed by the Secretary and then directed to the appropriate member(s) of the Board of Directors.

In addition, any interested party who wishes to communicate directly with our non-employee directors may contact Mr. Wolff,Locker, our Co-Chairman,Non-Executive Chairman, at the mailing address of the Company’s executive offices at 120 Vantis, Suite 350, Aliso Viejo, California 92656. All communications will be received and processed on a confidential basis by the Secretary and then directed to the appropriate non-employee director(s).

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Committees of the Board of Directors

Committees

Our Board of Directors has established a numbercomplements its oversight responsibilities through the following four standing committees, each of committees, includingwhich is briefly described below: the Compensation Committee, the Audit Committee, the Strategic Planning and Capital Markets Committee and the Nominating and Corporate Governance Committee, each of which is briefly described below.Committee. Each of our committees has a charter, current copies of which may be viewed in the Investor Relations section of our website at www.sunstonehotels.com. In addition, printed copies of our committee charters will be provided without charge upon request to Sunstone Hotel Investors, Inc., 120 Vantis, Suite 350, Aliso Viejo, California 92656, Attention: Secretary.

Compensation Committee

The Compensation Committee determines compensation and benefits for all executive officers, oversees our equity compensation plans and assists in the establishment of compensation policies applicable to employees generally. The members of the Compensation Committee are independent directors as required by the listing standards and rules of the NYSE, are “non-employee” directors within the meaning of Section 162(m) of the Code and the applicable rules of the SEC and are non-employee directors” for the purposes of Rule 16b-3 under the Securities Exchange Act of 1934, as amended, or the Exchange Act.

The Compensation Committee may, in its discretion, delegate all or a portion of its duties and responsibilities to a subcommittee of the Compensation Committee. From January 1, 2010 to February 1, 2011, thecurrent members of our Compensation Committee were Keith P. Russell andare Douglas M. Pasquale, Lewis N. Wolff and Thomas A. Lewis, who servedserves as the chair. Effective February 1, 2011, the Board of Directors by unanimous vote approved (a) Mr. Russell’s resignation as a member of the Compensation Committee, (b) Mr. Wolff to be a member of the Compensation Committee and (c) Mr. Lewis to serve as the chair of the Compensation Committee. The Compensation Committee held four meetings and acted by written consent on one occasion during 2010.2011. The Company expects that after the annual meeting, the Compensation Committee members will remain the same (Mr. Lewis as chair and Mr. Wolff as a member).

Finance and Capital Markets Committee

During the fourth quarter of fiscal year 2010, the Board elected to create the Finance and Capital Markets Committee to assist the Board in executing its responsibilities concerning the financial structure of the Company. Effective February 1, 2011, the Board elected to terminate the Finance and Capital Markets Committee and to assign to the Audit Committee the duties and responsibilities of the Finance and Capital Market Committee. The Finance and Capital Markets Committee held one meeting and acted by written consent on one occasion during 2010.same.

Audit Committee

Our Board of Directors has adopted an Audit Committee charter, which defines the Audit Committee’s purposes to include oversight of:

All of the members of the Audit Committee are financially literate within the meaning of the listing standards and rules of the NYSE. At least one member is an audit committee financial expert as that term is defined by applicable rules of the SEC, and at least one member possesses accounting and financial management expertise within the meaning of the listing standards and rules of the NYSE. The Board of Directors has determined that each member of the Audit Committee is independent within the meaning of the rules of both the NYSE and the SEC.

From January 1, 2010 to February 1, 2011, theThe current members of our Audit Committee were Thomas A. Lewis,are Andrew Batinovich, Z. Jamie Behar and Keith P. Russell, and Keith M. Locker, who servedserves as the chair. Effective February 1, 2011, the Board of Directors by unanimous vote approved (a) Mr. Lewis’ resignation as a member of the Audit Committee, (b) Ms. Behar to be a member of the Audit Committee, (c) Mr. Locker to continue to serve as the chair of the Audit Committee and (d) Mr. Russell to continue to serve as a member of the Audit Committee. The Audit Committee held fivefour meetings during 2010.2011. We expect that after the annual meeting, the Audit Committee members will remain the same (Mr. Locker as chair and Ms. Behar and Mr. Russell as members).same.

As indicated above, effective February 1, 2011, the Board elected to assign to the Audit Committee the duties and responsibilities of the Finance and Capital Market Committee. Simultaneously, the Audit Committee created the Finance and Capital Markets Sub-Committee of the Audit Committee. The Finance and Capital Markets Sub-Committee has the purpose and direct responsibility to (i) evaluate and consider corporate targets/objectives and action plans for leverage, liquidity and capital structure, (ii) evaluate, review and approve with management material transactions affecting the Company’s capital structure, liquidity, financing and such issues related thereto as it deems necessary or appropriate and (iii) perform any other duties or responsibilities expressly delegated to the Finance and Capital Markets Sub-Committee by the Board of Directors from time to time relating to the Company’s capital structure, liquidity and financing. The member composition of the Finance and Capital Markets Sub-Committee is the same as the Audit Committee; and, we expect that after the annual meeting the Finance and Capital Markets Sub-Committee members will remain the same (Mr. Locker as chair and Ms. Behar and Mr. Russell as members).

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Audit Committee Financial Expert

The Board of Directors has determined that each of Andrew Batinovich, Z. Jamie Behar Keith M. Locker and Keith P. Russell is qualified as an audit committee financial expert within the meaning of SEC regulations. In making this determination, the Board of Directors considered the following qualifications: (a) understanding of generally accepted accounting principles, or GAAP; (b) ability to apply GAAP to accounting for estimates, accruals and reserves; (c) experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the issues likely to be raised by our financial statements, or experience actively supervising persons engaged in these activities; (d) understanding of internal control over financial reporting; and (e) understanding of audit committee functions.

Strategic Planning and Capital Markets Committee

During the fourth quarter of fiscal year 2010, the Board of Directors elected to create the Finance and Capital Markets Committee to assist the Board of Directors in executing its responsibilities concerning the financial structure of the Company. Effective February 1, 2011, the Board of Directors elected to terminate the Finance and Capital Markets Committee and to assign to the Audit Committee the duties and responsibilities of the Finance and Capital Markets Committee. Simultaneously, the Audit Committee created the Finance and Capital Markets Sub-Committee of the Audit Committee. During the fourth quarter of fiscal year 2011, the Board of Directors elected to (a) terminate the Finance and Capital Markets Sub-Committee of the Audit Committee and (b) to create the Strategic Planning and Capital Markets Committee. The Finance and Capital Markets Committee held one meeting during 2011, the Finance and Capital Markets Sub-Committee of the Audit Committee held five meetings during 2011 and the Strategic Planning and Capital Markets Committee held one meeting during 2011.

The Strategic Planning and Capital Markets Committee has the purpose and direct responsibility to (i) evaluate and consider corporate targets/objectives and action plans for leverage, liquidity and capital structure, (ii) evaluate, review and approve with management material transactions affecting the Company’s capital structure and liquidity and such issues related thereto as it deems necessary or appropriate, (iii) review and discuss the Company’s short and long term business strategies, generally to include seeking to maximize stockholder value by focusing on acquisitions and dispositions in our core hotel markets in order to take advantage of our expertise in and knowledge of these markets and by maintaining a disciplined investment strategy, with the intention of delivering further improvement in financial results and enhanced stockholder value and (iv) perform any other duties or responsibilities expressly delegated to the Strategic Planning and Capital Markets Committee by the Board of Directors from time to time relating to the Company’s strategic plan, capital structure and liquidity.

The current members of our Strategic Planning and Capital Markets Committee are Z. Jamie Behar, Douglas M. Pasquale, Keith P. Russell and Keith M. Locker, who serves as the chair. The Company expects that after the annual meeting, the Strategic Planning and Capital Markets Committee members will remain the same.

Nominating and Corporate Governance Committee

The Board of Directors has delegated to the Nominating and Corporate Governance Committee the responsibility to select, or to recommend to the Board of Directors, nominees for election at any annual meeting, or any special meeting of stockholders, and any person to be considered to fill a vacancy or a newly created directorship that is the result of any increase in the authorized number of directors. The Nominating and Corporate Governance Committee is also responsible for nominating board committee members, reviewing our corporate governance guidelines, assisting with the annual evaluation of the Board of Directors and approving certain transactions involving a conflict of interest. The Board of Directors has determined that each of the members of the Nominating and Corporate Governance Committee is independent within the meaning of the listing standards of the NYSE.

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In connection with its annual process for identifying directors to nominate or renominate, or to be recommended to the Board of Directors for nomination or renomination, the Nominating and Corporate Governance Committee seeks to determine whether the proposed candidate demonstrates an ability and willingness to:

Additionally, in reviewing the qualifications of particular candidates, the Nominating and Corporate Governance Committee may choose to recommend individuals who can contribute an important, special or unique skill, expertise or perspective to the Board of Directors. The Nominating and Corporate Governance Committee also reviews the results of the self-evaluations provided by the directors with respect both to the Board of Directors and the individual directors and considers these results in light of the criteria for individual directors and objectives of the Board of Directors. Based on this process, the Nominating and Corporate Governance Committee is able to recommend, among other things, whether the existing Board of Directors contains the appropriate size, structure and composition, whether some or all of the incumbent directors should be recommended to the Board of Directors for re-nomination, and whether the Board of Directors should be enlarged to include additional directors.

If the Board of Directors determines to seek additional directors for nomination, the Nominating and Corporate Governance Committee will consider as potential director nominees candidates recommended by various sources, including any member of the Board of Directors or senior management. The Nominating and Corporate Governance Committee may also retain a third-party search firm to identify candidates. The Nominating and Corporate Governance Committee also considers recommendations for nominees that are timely submitted by stockholders and only if such recommendations are delivered in the manner prescribed by the advance notice provisions contained in Article II, Section 2.11 of our bylaws for stockholder proposals. (SeeSee “Stockholder Proposals for the 20122013 Annual Meeting.”) In addition to satisfying the timing, ownership and other requirements specified in Article II, Section 2.11 of the bylaws, a stockholder’s notice must set forth as to each person whom the stockholder proposes to recommend that the committee nominate for election to the Board of Directors all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, pursuant to Regulation 14A under the Exchange Act and our bylaws (including such person’s written consent to being named in the proxy statement as a nominee and to serve as a director if elected). Properly communicated stockholder recommendations will be considered in the same manner as recommendations received from other sources.

From January 1, 2010 to February 1, 2011, theThe current members of our Nominating and Corporate Governance Committee wereare Andrew Batinovich, Douglas M. Pasquale, Lewis N. Wolff and Z. Jamie Behar, Keith M. Locker and Lewis N. Wolff, who servedserves as the chair. Effective February 1, 2011, the Board of Directors by unanimous vote approved (a) Ms. Behar’s resignation as a member of theThe Nominating and Corporate Governance Committee (b) Mr. Wolff’s resignation of his position as the chair, and his continued service as a member, of the Nominating and Corporate Governance Committee and (c) Mr. Russell to serve as the chair of the Nominating and Corporate Governance Committee. The Nominating

and Corporate Governance Committee held one meetingeight meetings during 2010.2011. We expect that after the annual meeting, the Nominating and Corporate Governance Committee members will remain the same (Mr. Russell as chair and Mr. Locker and Mr. Wolff as members).same.

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Committee Membership

The table below summarizes both the current and expected (assuming that the nominees listed in Proposal 1 are elected as directors at the annual meeting) membership information for each of the Board of Directors committees:

The table below summarizes expected membership information for each of the Board of Directors committees assuming that the nominees listed in Proposal 1 are elected as directors at the annual meeting:

MeetingsExecutive Sessions of Non-EmployeeIndependent Directors

Ms. Behar and Messrs. Batinovich, Lewis, Locker, Pasquale, Russell and Wolff are currently our independent, non-employee directors. The independent, non-employee directors held fourseven meetings in 2010.2011. Following the annual meeting, we expect that our non-employee directors will be Ms. Behar and Messrs. Lewis, Locker, Russell and Wolff,remain the same as set forth in the immediately preceding sentence, and that Mr. WolffLocker will be selected to preside over executive sessions of the non-employee directors.

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Report of the Audit Committee of the Board of Directors

The following report of the Audit Committee does not constitute soliciting material and should not be deemed filed or incorporated by reference into any of Sunstone’s filings under the Securities Act of 1933, as amended, or under the Securities Exchange Act of 1934, as amended, except to the extent we specifically incorporate this report by reference.

The purpose of the Audit Committee of Sunstone Hotel Investors, Inc., or Sunstone, is to assist the Board of Directors in its oversight of (i) the integrity of Sunstone’s financial statements, (ii) Sunstone’s compliance with legal and regulatory requirements, (iii) the independent auditors’ qualifications and independence and (iv) the performance of the independent auditors and Sunstone’s internal audit function; to retain Sunstone’s independent auditors and to prepare this report. As set forth in the Audit Committee charter, which may be found in the Investor Relations section of Sunstone’s website at www.sunstonehotels.com, management of Sunstone is responsible for the preparation, presentation and integrity of Sunstone’s financial statements and Sunstone’s accounting and for ensuring that financial reporting principles and internal controls and procedures are designed to assure compliance with accounting standards and applicable laws and regulations. The independent auditors are responsible for auditing Sunstone’s financial statements and expressing an opinion as to their conformity with U.S. generally accepted accounting principles.principles, and an opinion on the effectiveness of internal control over financial reporting.

In performance of its oversight function, the Audit Committee has considered and discussed the audited financial statements with management and the independent auditors. The Audit Committee has also discussed with the independent auditors the matters required to be discussed by Statement on Auditing Standards No. 114 and61, as amended (AICPA, Professional Standards, Vol. 1, AU Section 380), as adopted by the Public Company Accounting Oversight Board, or the PCAOB, in Rule 2-07 of Regulation S-X.3200T. In addition, the Audit Committee has discussed with the independent auditors the auditors’ independence from Sunstone and its management, including the matters in the written disclosures and letter required by applicable requirements of the Public Company Accounting Oversight Board.PCAOB.

The members of the Audit Committee are not full-time employees of Sunstone and are not performing the functions of auditors or accountants. As such, it is not the duty or responsibility of the Audit Committee or its members to conduct “field work” or other types of auditing or accounting reviews or procedures or to set auditor independence standards. Members of the Audit Committee necessarily rely on the information provided to them by management and the independent accountants. Accordingly, the Audit Committee’s considerations and discussions referred to above do not assure that the audit of the Company’s financial statements has been carried out in accordance with U.S. generally accepted accounting principles or that the Company’s auditors are in fact “independent.”

In reliance on the reviews and discussions referred to above, and subject to the limitations on the role and responsibilities of the Audit Committee referred to above and in the Audit Committee charter, the Audit Committee recommended to the Board of Directors the inclusion of the audited financial statements in Sunstone’s 20102011 Annual Report on Form 10-K for filing with the Securities and Exchange Commission.

AUDIT COMMITTEE

Keith M. Locker,P. Russell, Chair

Andrew Batinovich

Z. Jamie Behar

Keith P. Russell

February 16, 201115, 2012

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Compensation of Directors

During 2010, eachCompensation of our independent directors was entitled to receive an annual cash retainer of $30,000 (payable in quarterly installments), an annual stock grant of shares having a value equal to $60,000 for serving on ourthe Company’s Board of Directors and an attendance fee paid in cash of $1,500 per meeting of our Board of Directors or any of its committees or sub-committees if the meeting was attended in person or $500 if the meeting was attended telephonically. Pursuant to an arrangement with Ms. Behar’s employer, all director fees for Ms. Behar (including the value of the annual stock grant and attendance fees), which amounted to $100,500 in 2010, are paid in cash to her employer. In addition, during 2010 the chair of our Audit Committee received a $15,000 cash retainer fee, and each chair of our Compensation Committee and Nominating and Corporate Governance Committee received a $7,500 cash retainer fee, in each case in cash payable in quarterly installments.2011

During the first quarter of 2011, due in part to a shareholderstockholder request regarding certain aspects of Director compensation Thepaid to members of our Board of Directors, FTI Schonbraun McCann Group, or Schonbraun, was engaged by the Nominating and Corporate Governance Committee to review current market terms of director compensation programs/levels and stock ownership guidelines within the REIT industry. ShonbraunSchonbraun prepared an analysis that detailed the 2009/2010 director compensation and equity ownership guidelines for two select groups of real estate companies, including the selective lodging sector peer group comprised of 20 publicly-traded REITs and Real Estate Operating Companies and an expanded peer group comprised of 55 publicly-traded REITs with implied equity market capitalizations ranging from approximately $1 billion to $3 billion. With respect to board compensation, the Schonbraun report noted that the Sunstone Board of Directors’ then-current total compensation package ranked in the 45^th percentile when compared to total compensation paid to directors by companies within Sunstone’s lodging sector peer group and ranked in the 47^th percentile when compared to total compensation paid to directors by publicly-traded REITs with implied equity market capitalizations ranging from approximately $1 billion to $3 billion. As for stock ownership guidelines, the Schonbraun report reflected the growing trend to establish stock ownership guidelines and provided the guidelines implemented at peer group companies.

In light of the above-mentioned Schonbraun report, and in order to ensure that the Company retains the service of its existing directors and is able to attract superior-talented persons should any of the existing directors cease service to the Company or if the Board of Directors elects to add directors, effective as of the first quarter 2011, the Board of Directors elected to modify its compensation structure as follows: (a) to increase the telephonic meeting attendance fee from $500 to $1,000 per meeting; (b) to increase the annual cash retainer paid to each chair of our Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee to $20,000, $10,000 and $10,000, respectively;respectively, from $15,000, $7,500 and $7,500, respectively (and, effective as of the fourth quarter 2011, the annual cash retainer for the chair of our Strategic Planning and Capital Markets Committee will be $20,000); (c) to increase the annual stock grant from $60,000 to $100,000, provided that, in order to more closely align the Board of Directors’ interests with those of the Company’s stockholders, the vesting period for such grants will change from one year to three years (such that the grants will vest in three equal installments beginning with the first anniversary of the grant date and continue annually thereafter); and (d) as discussed below, to implement director stock ownership requirements. TheEach member of the Board of Directors will continue to receivealso receives an annual cash retainer of $30,000 (payable in quarterly installments). and an attendance fee paid in cash of $1,500 for meetings attended in person, which amounts were not modified.

Starting in 2011, the Nominating and Corporate Governance Committee will beginbegan implementation of stock ownership requirements for Company directors. Under these guidelines, each existing director (with the exception of Ms. Behar) will be required, within three years of January 1, 2011, to hold stock valued at no less than three times the amount of the annual cash retainer paid to such director; and, for any new director, compliance with the guidelines will be required within three years after being elected to the Board of Directors. To determine compliance with the “stock ownership” under the guidelines, (a) we will include, in addition to shares the individual director owns outright, awarded but unvested restricted shares of Company stock.stock and (b) we will calculate the value of each director’s stock holdings based on the average closing price on the NYSE of the Company’s common stock for the year ended immediately prior to the applicable January 1 determination date. As of January 1, 2012, each member of the Company’s Board of Directors met or exceeded the stock ownership requirements. As indicated below in the “Security Ownership by Directors, Executive Officers and Five Percent Stakeholders” table, Ms. Behar does not hold any of the Company’s stock due to rules implemented by her employer that require all director fees to be paid in cash to her employer.

Furthermore, for fiscal year 2011 only, Mr. Wolff will receive,received, in addition to the compensation detailed above, $80,000 in cash payablepaid in quarterly installments of $20,000 and a restricted stock grant having a value of $150,000

$150,000 (which22

(which grant shall vestvests in three equal installments beginning with the first anniversary of the grant date)on February 17, 2011) for his expanded role during 2011, which includes,included, among other things, assisting management in sourcing and evaluating potential transactions.

Directors are also entitled to reimbursement for expenses incurred in fulfilling their duties as our directors and receive complimentary hotel rooms at our hotels and resorts when on personal travel. In certain circumstances, directors may also receive such complimentary hotel rooms at the Company’s hotels for one year following their retirement or resignation from the Board of Directors.

20102011 Independent Director Compensation

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Compensation of the Company’s Board of Directors for 2012

We expect that the compensation for our Board of Directors in 2012 will remain the same as paid in 2011, provided that the May 2012 restricted stock grant for Messrs. Batinovich and Pasquale will include an additional $50,000 in value for their service as directors during the period of November 7, 2011 to May 1, 2012 (representing one-half of the base annual stock grant received by all members of the Company’s Board of Directors for service from the 2011 annual meeting to the 2012 annual meeting), and provided further that compensation for our Non-Executive Chairman, Keith M. Locker, will be increased as set forth below and the May 2012 restricted stock grant for Mr. Locker will include an additional $30,000 in value for his service as our Non-Executive Chairman during the period of November 7, 2011 to May 1, 2012.

In October 2011, FPL Associates L.P., or FPL, a nationally recognized compensation consulting firm, was retained by the Nominating and Corporate Governance Committee to review the appropriate compensation program for our Non-Executive Chairman as compared to other public real estate companies, including our peers that have an independent, non-executive chairman. Based on the results of this analysis and its own subjective analysis of our Non-Executive Chairman’s anticipated role and responsibilities, the Nominating and Corporate Governance Committee recommended to our Board of Directors and the Board of Directors approved the following compensation for our Non-Executive Chairman, effective as of November 7, 2011: Mr. Locker will receive, in addition to the aforementioned standard compensation received by other members of our Board of Directors, a $60,000 cash retainer and a restricted stock grant having a value of $60,000 (which grant will vest in three equal installments beginning with the first anniversary of the grant date, which we expect to be May 2, 2012). Accordingly, assuming Mr. Locker is elected by our stockholders at the 2012 annual meeting to continue his service as a member of the Company’s Board of Directors, Mr. Locker will receive a stock grant of shares having a value equal to $190,000 (comprised of (a) $30,000 in respect of Mr. Locker’s service as our Non-Executive Chairman from November 7, 2011 to May 1, 2012, (b) $60,000 for Mr. Locker’s service as our Non-Executive Chairman from May 2, 2012 to the date of the Company’s 2013 annual meeting, and (c) $100,000 as part of the base annual stock grant received by all members of the Company’s Board of Directors for service from May 2, 2012 to the date of the Company’s 2013 annual meeting).

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Executive Officers

The following sets forth biographical information regarding our executive officers as of February 17, 2011,16, 2012, other than Mr. Alter,Cruse, whose biographical information is set forth above under “Proposal 1: Election of Directors.”

Kenneth E. CruseJohn V. Arabia,, 42, is our Executive Vice President of Corporate Strategy and Chief Financial Officer.Officer, or CFO. On February 14, 2011, we announced that we hired Mr. Cruse joined us inArabia as CFO and on April 2005 as Senior Vice President—Asset Management, and was appointed Senior Vice President—Corporate Finance on September 1, 2006, Senior Vice President and CFO on January 1, 2007, Executive Vice President and CFO on February 18, 2010, and President and CFO on December 17, 2010. Since December 2007, Mr. Cruse has been a director of BuyEfficient, LLC, a subsidiary of the Company. For the eight years prior4, 2011 his employment began. Prior to joining Sunstone, Mr. Cruse workedArabia served as Managing Director of Green Street Advisors’ highly respected real estate research team. Mr. Arabia joined Green Street in 1997 and was instrumental in creating the firm’s lodging research platform. Prior to joining Green Street, Mr. Arabia was a varietyConsulting Manager at EY Kenneth Leventhal and was largely responsible for the firm’s west coast lodging consulting practice which specialized in hotel market studies, valuation and acquisition due diligence. Mr. Arabia started his hotel career in 1987, working various entry-level operating positions at the Anaheim Marriott. Mr. Arabia, who earned a CPA certificate from the state of roles for Host Marriott Corporation, the predecessorIllinois, holds an M.B.A. degree in Real Estate/Accounting from The University of Host HotelsSouthern California and Resorts, Inc., most recently as Vice President, Corporate Finance. Mr. Cruse holds a B.S. degree in Hotel Administration from Colorado State University and an M.B.A. degree from GeorgetownCornell University.

Marc A. Hoffman,53,54, is our Executive Vice President and Chief Operating Officer, or COO. Mr. Hoffman joined us in June 2006 as Vice President – President—Asset Management, and was appointed Senior Vice President –— Asset Management in January 2007 and Executive Vice President and Chief Operating Officer on February 18, 2010. For the twenty-seven years prior to joining Sunstone, Mr. Hoffman served in various positions at Marriott International, Inc., including General Manager of The Vail Marriott, General Manager of Marriott’s Harbor Beach Resort and Spa, Marriott Market Manager for Fort Lauderdale, General Manager of The Ritz-Carlton Palm Beach (where under Mr. Hoffman’s leadership, the hotel obtained the Mobil 5 Star Award), and most recently as Vice President and Managing Director of Grande Lakes Orlando, which included the 1,000-room JW Marriott, the 584-room Ritz-Carlton Resort and Spa and The Ritz-Carlton Golf Club. Mr. Hoffman holds an AOSA.O.S. degree from The Culinary Institute of America and a B.A. degree from Florida International University.

John V. Arabia,Robert C. Springer,41. On February 14, 2011, we announced that we hired34, is our Senior Vice President—Acquisitions. Mr. Arabia as Chief Financial Officer and expect him to beginSpringer joined us in AprilMay 2011. Mr. Arabia is currently Managing Director of Green Street Advisors’ highly respected real estate research team. Mr. Arabia joined Green Street in 1997 and was instrumental in creating the firm’s lodging research platform. Prior to joining Green Street,Sunstone, Mr. ArabiaSpringer served as a Vice President in the Merchant Banking Division of Goldman, Sachs & Co. (“Goldman”) and was a Consulting Managerkey player in the firm’s principal lodging investing activity, which investments were primarily placed through the Whitehall Street Real Estate series of private equity funds, as well as the Goldman Sachs Real Estate Mezzanine Partners fund. Mr. Springer’s involvement with these funds spanned all aspects of hotel equity and debt investing, as well as asset management of numerous lodging portfolios. Mr. Springer joined Goldman in February 2006. Prior to joining Goldman, Mr. Springer worked in both the feasibility and acquisitions groups at EY Kenneth LeventhalHost Hotels & Resorts from 2004 to 2006 and was largely responsible forintegral to the firm’s west coastacquisition of several large lodging consulting practice which specialized in hotel market studies, valuation and acquisition due diligence.deals. Mr. ArabiaSpringer started his hotel career with PricewaterhouseCoopers, LLP in 1987, working various entry-level operating positions at the Anaheim Marriott.Hospitality Consulting Group from 1999 to 2004. Mr. Arabia, who earnedSpringer holds a CPA certificate from the state of Illinois, holds an MBA in Real Estate/Accounting from The University of Southern California and a Bachelor of ScienceB.S. degree in Hotel Administration from Cornell University.

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Executive Officer Compensation

Compensation Discussion and Analysis

This Compensation Discussion and Analysis explains our compensation philosophy and policies that apply to our executive officers, including our named executive officersthe Named Executive Officers listed in the Summary Compensation Table below, or the Named Executive Officers.below. It explains the structure and rationale associated with each material element of the compensation program for our executive officers,the Named Executive Officers, describes the actual compensation paid to our Named Executive Officers for 2010,2011, and provides important context for the more detailed disclosure relating to our Named Executive Officers in the compensation tables following this Compensation Discussion and Analysis.

During 2010, we had2011, the Board of Directors made several developments inmeaningful changes to the composition of ourthe Company’s senior management team. On February 18, 2010, team:

In accordance with the rules of the SEC, each of these individuals—Messrs. Alter, Arabia, Cruse was promoted to Executive Vice President and CFO andSpringer (as well as Mr. Hoffman, was promoted to Executive Vice President and COO. Effective December 17, 2010, Mr. Buser, our President since July 21, 2008 and CEO since January 22, 2009, resigned his position as President, CEO and director of the Company. Simultaneously with Mr. Buser’s resignation, Mr. Cruse was promoted to President (and continues to also serve as our CFO). Mr. Alterwho continues to serve as our Executive Chairman.

In determining the 2011 compensation programs for Messrs. AlterVice President and Cruse, the Company’s BoardCOO)—are Named Executive Officers. Accordingly, this Compensation Discussion and Analysis discusses certain on-going arrangements with respect to those of Directors considered the fact that said executives would effectively serve as joint leaders ofour Named Executive Officers who were employed by the Company duringat the end of 2011, as well as specific arrangements entered into with Mr. Alter who resigned from his employment with the Company on November 7, 2011. Accordingly, the 2011 compensation programs for Messrs. Alter and Cruse were structured to result in similar compensation levels based on the achievement of certain shared objectives. The 2011 compensation programs for Messrs. Alter and Cruse are further discussed under “Compensation Plans and Agreements” below.

This Compensation Discussion and Analysis contains statements regarding Company performance targets and goals. These targets and goals are disclosed in the limited context of our executive compensation programs and should not be understood to be statements of management’s future expectations or estimates of future results or other guidance. We specifically caution investors not to apply these statements to other contexts.

Improvements to the Company’s Compensation and Governance Programs

The Board of Directors, the Compensation Committee and our management team understand it is our responsibility to structure our compensation program in a way that is highly aligned with the interests of our stockholders. Although the advisory stockholder vote on executive compensation is non-binding, the Compensation Committee has considered and will continue to consider the outcome of the vote when making future compensation decisions for Named Executive Officers. As indicated above, at our annual meeting of stockholders held on May 4, 2011, approximately 76% of the stockholders who voted on the “say-on-pay” proposal approved the compensation of our Named Executive Officers. Though the Compensation Committee believes that the stockholder vote, in large part, endorses the Company’s compensation program, the Compensation Committee endeavors to continue improving the Company’s compensation program to more closely align compensation with the interests of our stockholders. To this end, the Compensation Committee has materially redesigned the Company’s compensation programs. Likewise, the Board of Directors has made numerous corporate governance improvements. Examples of recent improvements to the Company’s compensation and governance programs include the following:

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Compensation Philosophy and Objectives

The Compensation Committee seeks to attract, motivate and retain Sunstone’s executive officers through competitive compensation arrangements that, within appropriate risk parameters, provide strong financial incentives for the executive officers to maximize stockholder value.

Our executive compensation program is designed to reward performance relative to financial and other metrics that we believe will result in favorable total stockholder returns, both in terms of absolute appreciation in the value of our shares, and in terms of relative performance as compared to our peers, taking into consideration our competitive position within the real estate industry and each executive’s long-term career contributions to the Company.

In order to achieve these compensation objectives, the Compensation Committee has established a compensation structure that primarily rewards our executives for performance relative to financial metrics and other financial indicators that we believe are related to maximizing stockholder value in our industry. The Compensation Committee has also designed the compensation program to reward our executive officers at levels

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that the Compensation Committee generally believes to be competitive for companies in its industry, including in part as a result of the review of executive officer compensation levels at certain companies in a peer group, as identified below. These compensation objectives are also furthered by the compensation program providing that a significant amount of the executive officer’s total compensation will be variable and will be awarded by reference to these key financial metrics and other financial indicators.

To implement these We have not adopted any formal policies or guidelines for allocating compensation objectives,between long-term and short-term compensation, between cash and non-cash compensation or among different forms of cash and non-cash compensation. We believe the executivemetrics for both the annual cash incentive bonuses and equity incentive awards for our Named Executive Officers demonstrate stockholder-favorable compensation program for fiscal year 2010 generally consistedpractices. Our focus with respect to compensation of a combination of:our Named Executive Officers will continue to be aligned with performance relative to key growth metrics, including TSR, return on assets and growing our share of business in the markets in which we compete.

Implementation of our Compensation Philosophy and Objectives

Compensation Committee

The Compensation Committee assists the Board of Directors in discharging the Board of Directors’ responsibilities relating to compensation of our executive officers. It evaluates and recommends to the Board of Directors appropriate policies and decisions relative to executive officer benefits, bonus, incentive compensation, severance, and equity-based or other compensation plans. It also oversees preparation of executive compensation disclosures for inclusion in our proxy statement and assists management in regulatory compliance with respect to compensation matters. The current members of theour Compensation Committee in 2010 were Keith P. Russellare Thomas A. Lewis, Douglas M. Pasquale and Lewis N. Wolff, (and effective February 1, 2011, the members of the Compensation Committee are Mr. Wolff and Thomas A. Lewis, Jr.), each of whom (including Mr. Lewis) is “independent” within the meaning of the listing standards of the NYSE, is a “non-employee director” within the meaning of Rule 16b-3 of the Exchange Act and is an “outside director” within the meaning of Section 162(m) of the Code.

The Compensation Committee exercises independent discretion and judgment in making compensation decisions after evaluating the Company’s performance, the executive’s past performance, including the extent to which the executive has met or exceeded specified targets or affected the Company’s performance, and the executive’s long-term potential to enhance stockholder value. In connection with the executive compensation determination process, the Compensation Committee seeks input from the Company’s CEO or the principal executive officer (as the case may be) regarding the compensation of the executive officers other than the CEO or principal executive officer. Although the Compensation Committee discusses the CEO or principal executive officer’s compensation with him, the CEO or principal executive officer does not provide recommendations for changes in his own compensation, and final deliberations and all votes regarding the recommendation of his compensation to the full Board of Directors are made in executive sessions, without the CEO or principal executive officer present. Only Compensation Committee members vote on recommendations to the full Board of Directors regarding changes in executive compensation.

As described in more detail below, compensation for fiscal year 20102011 for each of our executive officersNamed Executive Officers was determined by the Compensation Committee based upon a review of the Company’s performance, the individual performance of each such executive officer,Named Executive Officer, total compensation paid by the Company to each executive officerNamed Executive Officer in prior years, and, in certain instances, taking into account certain peer group information provided in a compensation consultant’s report.by FPL. The Compensation Committee’s analysis is discussed below in the context of each element and amount of compensation.

The annual cash incentive bonus and equity incentive awards for a fiscal year are typically paid in the first quarter of the subsequent fiscal year, when audited financial statements for such fiscal year become available for the Company. For example, in February 2011,2012, we paid the 20102011 cash incentive bonuses and issued long-term equity incentive awards to the Named Executive Officers with respect to the Company’s performance for fiscal year 2010.2011.

ConsultantsCompensation Consultant

In connection with compensation decisions madeTo assist it in 2010, our Compensation Committee referred to a report prepared by Schonbraun in December 2009. At that time, Schonbraun was asked to report tocarrying out its responsibilities, the Compensation Committee on market data onis authorized to retain the services of independent compensation advisors for purposes of advice and consultation with respect to compensation of our executive pay levels, including a comparisonofficers. During fiscal year 2011, the Compensation Committee engaged FPL. The Compensation Committee has sole authority to retain or terminate FPL as the Compensation Committee’s executive compensation consultant and to approve its fees and other terms of each executive officer’s currentengagement. The Compensation Committee will consider, not less than annually, the independence of FPL and its other advisors and determine whether any related conflicts of interest require disclosure.

In making certain compensation level todecisions in 2011, the average compensation level for such position at peer companies, as well as to recommend acceptable metrics within which to upsize the Company’s 2004 Long-Term Incentive Plan.Compensation Committee relied upon FPL to:

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Peer Group Information

InThe Compensation Committee uses comparison data from various companies in certain peer groups as a guide in its review and determination of base salaries, annual cash bonuses and restricted stock awards. During 2011, the Compensation Committee reviewed peer group data to assist in its determination regarding compensation for the Named Executive Officers for 2011, the award of restricted stock granted to Mr. Cruse in connection with its engagement in 2009, Schonbraunhis promotion to CEO on August 5, 2011, and compensation for our CEO for 2012. The Compensation Committee evaluates our performance and determines whether the compensation elements and levels that we provide to our executive officers are generally appropriate relative to the compensation elements and levels provided certain market data on executive pay levels for a group ofto their counterparts at our peer companies, in light of our performance relative to our peers and comparedin light of each executive officer’s contribution to our 2009 executive compensation levelsperformance.

In 2011, the Compensation Committee, with thisthe help of FPL, determined the composition of our peer groups and the criteria and data used in compiling our peer group information.lists. The peer groupgroups selected and used by the Compensation Committee are all public real estate companies were selected by Schonbraun based on their market size, and are divided into two groups: hotel REIT peers and size/geographic location, property type and asset quality. Thepeers. Each peer group companies for purposes of Schonbraun’s 2009 review of executive compensation consisted of, among other hospitality real estate investment trusts, the following:is discussed and identified below:

Hersha Hospitality Trust

Other thanManagement’s Involvement in Compensation Decisions

The Compensation Committee exercises independent discretion and judgment in making compensation decisions after evaluating the Company’s performance, the executive’s past performance, including the extent to which the executive has met or exceeded specified targets or affected the Company’s performance, and the executive’s long-term potential to enhance stockholder value. In connection with the Schonbraun engagement, as a general matter, our Compensation Committee has not engaged in benchmarking ofexecutive compensation of our executive officers against other companies, but instead has relied on its own experience and judgment with respect to determining the competitiveness of Sunstone’s compensation arrangements. In addition, with respect to the peer group information provided by Schonbraun,

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determination process, the Compensation Committee used that informationseeks input from the Company’s CEO regarding the compensation of the Named Executive Officers other than the CEO. In addition, from time to time, the Compensation Committee will direct management to work with its consultant(s) in a subjective mannerproviding proposals, program design and compensation recommendations. The CEO does not provide recommendations for changes in its evaluationhis or her own compensation. Any proposed changes to CEO compensation are recommended to the Board of Directors by the Compensation Committee, and final deliberations and all votes regarding CEO compensation are made in making decisions concerning executive compensation as more particularly described, where applicable, below.sessions, without the CEO present. Only Compensation Committee members vote on recommendations to the full Board of Directors regarding changes in executive compensation.

Tax Considerations

We take into account tax implications in the design of our executive compensation program. For example, pursuant to Section 162(m) of the Code, publicly traded companies may not deduct, in any taxable year, compensation in excess of $1,000,000 paid to their chief executive officer and each of the next three most highly compensated executive officers as of the end of any fiscal year (other than the chief financial officer) unless that compensation qualifies as “performance-based compensation” as defined in Section 162(m). The Compensation Committee believes that it is in the best interests of the Company and its stockholders to comply with the limitations of Section 162(m) of the Code to the extent practicable and consistent with retaining, attracting and motivating the Company’s Named Executive Officers. The Executive Incentive Plan provides for the payment of annual incentive compensation in the form of cash bonuses or equity awards granted under the LTIP which is generally intended to qualify as “performance-based” compensation under Section 162(m). Nevertheless, there can be no assurance that this or any other of our incentive compensation will be treated as “performance-based compensation” under Section 162(m). In addition, the Compensation Committee has reserved the right to pay executives compensation that may be subject to the deduction limit under Section 162(m) when the Compensation Committee believes that such compensation is appropriate, consistent with the Compensation Committee’s philosophy and in our and our stockholders’ best interests.

Section 409A of the Code

Section 409A of the Code requires that “nonqualified deferred compensation” be deferred and paid under plans or arrangements that satisfy the requirements of the statute with respect to the timing of deferral elections, timing of payments and certain other matters. Failure to satisfy these requirements can expose employees and other service providers to accelerated income tax liabilities, penalty taxes and interest on their vested

compensation under such plans. Accordingly, as a general matter, we design and administer our compensation and benefits plans and arrangements for all of our employees and other service providers, including our named executive officers,Named Executive Officers, in a manner intended either to be exempt from, or to satisfy the requirements of, Section 409A.

Section 280G of the Code

Section 280G of the Code disallows a tax deduction with respect to excess parachute payments to certain executives of companies which undergo a change in control. In addition, Section 4999 of the Code imposes a 20 percent penalty on the individual receiving the excess payment. Parachute payments are compensation that is linked to or triggered by a change in control and may include, but are not limited to, bonus payments, severance payments, certain fringe benefits and payments and acceleration of vesting from long-term incentive plans including stock options and other equity-based compensation. Excess parachute payments are parachute payments that exceed a threshold determined under Section 280G based on the executive’s prior compensation. In approving the compensation arrangements for our named executive officers,Named Executive Officers, our compensation committeeCompensation Committee considers all elements of the cost to our Company of providing such compensation, including the potential impact of Section 280G. However, our compensation committeeCompensation Committee may, in its judgment, authorize compensation arrangements that could give rise to loss of deductibility under Section 280G and the imposition of excise taxes under Section 4999 when it believes that such arrangements are appropriate to attract and retain executive talent. No Named Executive Officer is entitled to any tax gross-up payments in the event that any excise taxes are imposed on parachute payments.

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Accounting Standards

Accounting Standards Codification Topic 718,Compensation—Stock Compensation(referred to as ASC Topic 718), requires us to recognize an expense for the fair value of equity-based compensation awards. Grants of stock options, restricted stock, restricted stock units and performance units under our equity incentive award plan will be accounted for under ASC Topic 718. Our Compensation Committee regularly considers the accounting implications of significant compensation decisions, especially in connection with decisions that relate to our equity incentive award plans and programs. As accounting standards change, we may revise certain programs to appropriately align accounting expenses of our equity awards with our overall executive compensation philosophy and objectives.

Elements of Executive Compensation

We use a portfolio of pay components to accomplish our compensation philosophy and objectives discussed above. Our executive compensation program consists of the following components:

Annual Base Salary

The annual base salary component of an executive officer’s compensation is intended to provide a reasonable standard of living and a base wage at levels believed by the Compensation Committee to be

competitive. The Compensation Committee reviews base salaries annually, but base salaries are not automatically increased pursuant to pre-determined formulas or otherwise (other than annual cost-of-living increases provided pursuant to certain of our executives’ employment agreements) and may not be increased if, among other things, the Compensation Committee believes that other elements of compensation are more appropriate in light of the Company’s stated objectives. This strategy is consistent with the Company’s primary goal of offering compensation that is intended to incentivize an executive officer to seek to maximize stockholder returns and that is contingent on the achievement of performance objectives. Each executive officer’s base salary serves as the base amount for determining annual cash and equity incentive award opportunities, which are calculated as percentages of such executive’s base salary.

The base salary of each of our executive officers is based on the review of the Compensation Committee described above and the following:

This determination is not formulaic and is not based on specific Company or individual performance targets objectives, but rather is subjective and made in light of our compensation philosophy and objectives described above. In light of market conditions and the overall economic environment during 2009, none of our named executive officers received a salary increase during 2009. In addition, based on similar considerations, Mr. Alter agreed to a decrease of $100,000 in salary in 2010, lowering his total 2010 annual salary to $186,000, and Mr. Buser agreed not to receive a salary increase for 2010. The following is a discussion of the base salary determinations for each of our Named Executive Officers.

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Kenneth E. Cruse. Mr. Cruse’s annual base salary for the period of January 1, 2009 to February 21, 2010 was $294,193. Mr. Cruse’s annual base salary was increased to $350,000, effective February 22, 2010, representing an increase of approximately 19%. In connection with his promotion to President, Mr. Cruse’s base salary was increased to $400,000, effective January 1, 2011, representing an increase of approximately 14%. Effective January 1, 2012, Mr. Cruse’s base salary was increased to $550,000 in light of his promotion to CEO, representing an increase of 37.5%. Mr. Cruse’s annual base salary is materially below the base salary level the Company has traditionally paid its CEOs, and is materially below the average CEO base salary of the Company’s Hotel REIT peer group. The Compensation Committee believes that a compensation program which puts the majority of the CEO’s potential compensation “at risk” subject to the attainment of predetermined performance goals, strongly aligns CEO compensation with the objectives of our stockholders.

Robert A. Alter. From January 1, 2008 to July 20, 2008, Mr. Alter’s annual base salary in his capacity as our Executive Chairman was $275,000. After Mr. Alter’s appointment to interim CEO, effective March 21, 2008, his employment agreement was amended to increase his annual base salary to $475,000 effective July 21, 2008. Upon Mr. Buser’sIn connection with the CEO appointment to CEO, effectivein January 22, 2009, Mr. Alter’s annual base salary was returned to $286,000, pursuant to the terms of his employment agreement, reflecting a cost-of-living increase of 4% to his original base salary of $275,000. Effective February 22, 2010, Mr. Alter’s base salary was decreased to $186,000 for calendar year 2010. Commencing January 1, 2011, Mr. Alter’s base salary reverted back to $286,000. Mr. Alter’s annual base salary was increased to $309,338, effective February 21, 2011, representing two successive 4% increases to Mr. Alter’s 2009 salary of $286,000. Mr. Alter resigned from his position as Executive Chairman of the Company, effective November 7, 2011.

Arthur L. Buser, Jr. From July 21, 2008 to January 21, 2009, during which time Mr. Buser served as the Company’s President, his annual base salary was $425,000. Upon Mr. Buser’s appointment to CEO, effective January 22, 2009, his annual base salary was increased from $425,000 to $650,000, pursuant to the terms of his employment agreement. Mr. Buser’s base salary for 2010 was $650,000. Mr. Buser’s employment with the Company ended on December 17, 2010.

Kenneth E. CruseJohn V. Arabia. Mr. Cruse’sArabia’s annual base salary for the period of January 1, 2009April 4, 2011 to February 21, 2010December 31, 2011 was $294,193.$375,000. Mr. Cruse’s annualArabia’s base salary was increased to $350,000, effective February 22, 2010, representing an increase of approximately 19%. In connection with his promotion to President, Mr. Cruse’s base salary was increased to $400,000, effective January 1, 2011, representing an increase of approximately 14%.will remain at $375,000 during 2012.

Marc A. Hoffman. Mr. Hoffman’s annual base salary for the period of January 1, 2009 to February 21, 2010 was $301,069. Effective February 22, 2010, Mr. Hoffman’s annual base salary was increased to $350,000 in connection with his promotion to Executive Vice President and COO, representing an increase of approximately 16%; and, on February 17, 2011,. Furthermore, Mr. Hoffman’s annual base salary was increased to $375,000 representing an increaseon February 17, 2011. Mr. Hoffman’s base salary will remain at $375,000 during 2012.

Robert C. Springer. Mr. Springer’s annual base salary for the period of approximately 7%.May 31, 2011 to December 31, 2011 was $285,000. Mr. Springer’s base salary will remain at $285,000 during 2012.

Annual Cash Incentive Bonuses and Equity Incentive Awards

We use annual cash incentive bonus and equity incentive awards to further motivate executive officers by establishing a relationship between the bonuses and awards and the performance of the Company and the executive officer. All of our executive officers are eligible to participate in the Executive Incentive Plan.Plan, which is described below. We believe that tying our executive officers’ cash bonus and long-term equity compensation to the quantitative metrics discussed below provides a strong financial incentive to maximize stockholder value.

The annual cash incentive bonus and equity incentive awards granted under the Executive Incentive Plan are intended to compensate our executive officers for achieving our annual financial goals at both the corporate and hotel asset levels and for implementing long-term plans and strategies. The annual cash incentive bonus and annual equity incentive award program is based on performance and responsibility level rather than on the basis of seniority, tenure or other entitlement. Each year, the Compensation Committee establishes performance-based criteria, both corporate and individual, for each Named Executive Officer, and the level of achievement of those criteria determines the size of the annual bonuses and awards made to the Named Executive Officer in the next calendar year. This performance-based program encouragesis intended to encourage our officers to continually improve their capabilities to enhance performance and deliver positive business results.

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The annual equity incentive awards are also intended to encourage ownership, foster retention and align the executive officers’ interests with the long-term interests of our stockholders. Historically, we have used restricted stock awards that are granted based on achievement of pre-established performance goals and generally vest over a three-year period. We use restricted stock for these awards in order to confer the full value of the equity because these awards are granted in respect of prior attainment of performance objectives, but we subject these awards to three-year vesting to provide retention and integrity incentives. Because the awards are only granted if certain performance criteria are met, we generally do not utilize additional performance-based criteria in connection with the vesting of these awards.

As described further below, the Compensation Committee sets the target annual cash incentive bonus and equity incentive award levels for each Named Executive Officer based on the achievement of objective corporate performance criteria as well as subjective individual performance criteria. The amounts of the awards are set at levels designed to provide the executives with a significant incentive to enhance stockholder value. Accordingly, as discussed below, the target annual incentive cash bonus and target annual equity incentive award for each executive officer are set at levels that represent a significant percentage of such officer’s overall compensation arrangements.

Criteria and Metrics for 20102011 Incentive Compensation.Compensation

In the first quarter of 2010 (consistent2011 with prior years),respect to Messrs. Alter, Cruse and Hoffman and in the second quarter with respect to Messrs. Arabia and Springer, the Compensation Committee established quantitative and qualitative performance measures for both the annual cash incentive bonuses and the annual equity incentive awards. For Messrs. Alter and Cruse, 100% of each of the potential annual cash incentive bonus and the annual equity incentive award is based upon the achievement of the Seven Components (defined below); for Messrs. Arabia and Hoffman, 75% of each of the potential annual cash incentive bonus and the annual equity incentive award is based upon the achievement of the Seven Components and the remaining 25% is based upon achievement of individual goals (discussed below); and for Mr. Springer, 50% of each of the potential annual cash incentive bonus and the annual equity incentive award is based upon the achievement of the Seven Components and the other 50% is based upon achievement of individual goals (discussed below). The relative weighting of the Seven Components and individual goals established by the Compensation Committee for each of our Named Executive Officers reflects its analysis of the appropriate amount of emphasis to place on both objective corporate and subjective individual goals, and not any pre-determined formula or methodology. The Compensation Committee may, at its discretion, adjust criteria to account for significant intra-year transactions and circumstances.

The Compensation Committee determined that the amounts of the bonuses and awards to each Named Executive Officer would, either in part or in whole, be based on the achievement of the following fourseven components, each weighted as described:described (with the ranges representing variation in weighting among our Named Executive Officers as opposed to a range for each Named Executive Officer): (1) 25%10-20% based on return on investment;assets; (2) 25%10-20% based on adjusted funds from operations, or adjusted FFO, per share (as described below);share; (3) 25%10-20% based on Company performance relative to the following three criteria: (i) gross operating profit flow through, or GOP flow through; (ii) improvementtotal stockholder return; (4) 5-10% based on total 2011 acquisitions value; (5) 5-10% based on growth to the revenue per available room index, or RevPAR index; and (iii) achievement by Company employees of individual goals; and (4) 25%(6) 5-10% based on subjectiveimprovement to the Company’s fixed charge coverage ratio; and objective measures(7) 5-10% based on improvement to the Company’s debt/EBITDA ratio (collectively, the “Seven Components”). Each of the officer’s individual performance. Adjusted FFOSeven Components is the net income (loss) computed in accordance with GAAP, excluding gains and losses from sales of property, plus real estate-related depreciation and amortization (excluding amortization of deferred financing costs) and after adjustment for unconsolidated partnerships, joint ventures, prepayment penalties, written-off deferred financing costs, impairment losses and other identified adjustments. GOP flow through is the quotient of operating income (adjusted EBITDA) divided by revenues, and RevPAR index is the quotient of RevPAR divided by the average RevPAR of competitors, multiplied by 100. A RevPAR index in excess of 100 indicates achievement of higher RevPAR than competitors and RevPAR below 100 indicates lower performance than that of competitors. The weighting established by the Compensation Committee reflects its subjective analysis of the appropriate amount of emphasis to place on both objective

corporate and subjective individual goals, and not any pre-determined formula or methodology. The Compensation Committee may adjust criteria to account for material intra-year transactions and circumstances.further discussed below.

For each of these four components,the Seven Components, the Compensation Committee established four achievement levels—”“Threshold,” “Target,” “High” and “Superior,” and for each achievement level, a corresponding multiple.multiple for base salary for each Named Executive Officer. For any of the components, the amount granted to the applicable Named Executive Officer was the product of (a) his base salary, (b) the weighting for that component, as described above, (c) the multiple corresponding to histhe level of achievement and (d) the Compensation Committee’s subjective assessment as to whether the Named Executive Officer’s performance warranted an increase or decrease from the target levels.

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Return on InvestmentAssets. The primary objective of the return on investmentassets component is to measure the financial performance of the Company’s gross investment in hotels, joint ventures and related businesses owned for the entire subject year. Any intra-year acquisitions or dispositions are excluded from the calculation. Return on investmentassets is calculated as In Place EBITDA/In Place Assets, where:

The Compensation Committee determined that for fiscal year 2010, the range for return on investment should be as described in the table below. The Compensation Committee set these levels such that the “Threshold” equals a minimally-expected ratio of EBITDAequates to invested capital for a stabilized portfolio of hotel7.50% return on assets, the “Target” level equates to a typically expected ratio of EBITDA to invested capital for a stabilized portfolio of hotel8.00% return on assets, the “High” level equates to an above-average ratio of EBITDA to invested capital for a stabilized portfolio of hotel8.50% return on assets and the “Superior” level equates to a well-above average ratio of EBITDA9.00% return on assets. For fiscal year 2011, the Company’s return on assets, calculated in accordance with the foregoing, was determined to invested capital for a stabilized portfolio of hotel assets.be 7.10%. The Threshold level (7.50%) was not attained and, therefore, no amounts were paid to the Named Executive Officers with respect to this metric.

Adjusted FFO Per Share. The primary objective of the adjusted FFO per share component is to measure management’s ability to budget appropriately and oversee the financial performance of the Company. We adjustAdjusted FFO for items including, but not limited to, write-offis the net income (loss) computed in accordance with GAAP, excluding non-controlling interests and gains and losses from sales of property, plus real estate-related depreciation and amortization (excluding amortization of deferred financing fees, prepaymentcosts) and after adjustment for unconsolidated partnerships, joint ventures, penalties, gains andwritten-off deferred financing costs, impairment losses on extinguishment of debt, goodwill and other impairments, along with adjustments relating to prior periods.identified adjustments. In 2010,2011, we adjusted FFO for the write-off of deferred financing fees, default ratenon-cash straightline lease expense, non-cash interest loan penaltiesrelated to loss on derivatives (net), gain on remeasurement of equity interests, closing costs on completed acquisitions, impairment losses, legal settlement costs, and fees, gainsgain on extinguishment of debt, property impairment losses, closing costs on a completed acquisition, due diligence costs on an abandoned project, and costs associated with CEO severance along with related amortization of deferred stock compensation.debt.

The Compensation Committee determined that for fiscal year 2010,2011, the range for adjusted FFO per share should be as described in the table below. The Compensation Committee set these levels such that the “Threshold” generally approximates the low end of the Company’s initial adjusted FFO per share guidance, the “Target” generally approximates the mid-point of the Company’s initial adjusted FFO per share guidance, the “High” generally approximates the high end of the Company’s initial adjusted FFO per share guidance and the “Superior” corresponds to a level in excess of the high end of the Company’s initial adjusted FFO per share guidance. For fiscal year 2011, the Company’s adjusted FFO per share, calculated in accordance with the foregoing, was $0.87. This resulted in the funding of the adjusted FFO per share component at the Superior level ($0.80) for each of the Named Executive Officers, as shown in the table below.

Company Performance.Total Stockholder Return.Total stockholder return, or TSR, was measured by us for 2011 as the increase in the year-end price of the Company’s common stock over the prior year’s end price, plus dividends paid on the Company’s common stock during the year. The stock price was calculated based on the average closing price of the Company’s common stock on the NYSE during the last 20 trading days of the relevant fiscal year (i.e., December 2-30 for fiscal year 2011). The Compensation Committee determined that for fiscal year 2011, the range for total stockholder return should be as described in the table below. The Compensation Committee set these levels such that the “Threshold” equates to 8.00% TSR, the “Target” equates to 10.00% TSR, the “High” equates to 12.00% TSR and the “Superior” equates to 14.00% TSR. For fiscal year 2011, the Company’s total stockholder return, calculated in accordance with the foregoing, was -23.2%. The Threshold level (8.00%) was not attained and, therefore, no amount was paid to the Named Executive Officers with respect to this metric.

GOP Flow ThroughTotal Acquisitions Value. This component was measured based on the gross purchase price paid by the Company to acquire hotel assets during fiscal year 2011, as well as the gross valuation of partnership assets in

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respect of any transaction involving the acquisition of a partnership interest during fiscal year 2011. The Compensation Committee determined that for fiscal year 2011, the range for total acquisitions value should be as described in the table below. The Compensation Committee set these levels such that the “Threshold” equates to $500.0 million in acquisition value, the “Target” equates to $750.0 million in acquisition value, the “High” equates to $1.0 billion in acquisition value and the “Superior” equates to $1.25 billion or more in acquisition value. For fiscal year 2011, the Company’s total acquisitions value, calculated in accordance with the foregoing, was $0.9 billion. This resulted in the funding of the total acquisitions value component at the Target level ($0.75 billion) for each of the Named Executive Officers.

RevPAR Index ImprovementGrowth. As stated above, GOP flow throughThe primary objective of this component is to measure the quotientCompany’s performance in capturing its proportionate share of operating income (adjusted EBITDA) divided by revenues. GOP flow through measuresrevenue in the ability ofmarkets in which the

Company to stabilize bottom line revenue, through implementation of strategic resource allocation. Also ascompetes for business. As stated above, RevPAR index is the quotient of RevPAR divided by the average RevPAR of competitors, multiplied by 100. A RevPAR index in excess of 100 indicates achievement of higher RevPAR than competitors and RevPAR below 100 indicates lower performance than that of competitors. These two metrics measure the employees’ collective performance relative to stabilizing returns and capturing the Company’s proportionate share of revenue in the markets in which the Company competes for business.

For fiscal year 2010, theThe Compensation Committee determined that for fiscal year 2011, the range for GOP flow throughRevPAR index growth should be as described in the table below. The Compensation Committee set these levels such that the “Threshold” equates to 25% GOP flow through,an increase to RevPar index of 100 basis points, the “Target” equates to 30% GOP flow through,an increase to RevPar index of 200 basis points, the “High” equates to 35% GOP flow throughan increase to RevPar index of 300 basis points and the “Superior” equates to 40% GOP flow through. As foran increase to RevPar index of 400 basis points. For fiscal year 2011, the Company’s RevPAR index improvement, the Compensation Committee determined that this goalgrowth was 10 basis points. The Threshold level (100 basis points) was not achieved for fiscal year 2010. The range for RevPAR index improvement is described in the table below.

Achievement by Company Employees of Individual Goals. The objective of this goal isattained and, therefore, no amounts were paid to foster the relationships of the Named Executive Officers with their respective subordinatesrespect to this metric.

Fixed Charge Coverage Ratio. The primary objective of this component was to measure the Company’s progress against its credit objectives during 2011. This component was calculated by incentivizingdividing the Named Executive Officers to facilitate personal growth and development of subordinate employees. Like our Named Executive Officers, each Company employee is required to identify, set and strive to achieve certain personal goals. We believe personal goals ensure accountability, performance and personal development. By incentivizing our Named Executive Officers to actively assist subordinate employees to achieve personal goals, we are facilitating personal interaction amongCompany’s pro forma adjusted EBITDA for fiscal year 2011 by the Named Executive Officers and subordinates, which furthers our objective to create a collegial and productive work environment.

pro forma full-year interest expense for fiscal year 2011. The Compensation Committee determined that for fiscal year 2010,2011, the range for achievement of this goalthe fixed charge coverage ratio component should be as described in the table below. The Compensation Committee set these levels such that the “Threshold” equates to 90% of Company employees achieving all of their respective personal goals,1.35x coverage, the “Target” equates to 93% of Company employees achieving all of their respective personal goals,1.40x coverage, the “High” equates to 97% of Company employees achieving all of their respective personal goals1.45x coverage and the “Superior” equates to 100%1.50x coverage or more. For fiscal year 2011, the Company’s fixed charge coverage ratio, calculated in accordance with the foregoing, improved to 1.46x coverage. This resulted in the funding of Company employees achieving allthe fixed charge coverage ratio component at the High level for each of their respective personal goals.the Named Executive Officers.

Individual GoalsDebt/EBITDA. The primary objective of this component was to measure improvement to the individual goalsCompany’s progress against its credit objectives. The ratio was calculated as the ratio of the Company’s total net debt to the Company’s reported Adjusted EBITDA for fiscal year 2011. This component was calculated by dividing the Company’s net indebtedness by the pro forma 2011 full-year EBITDA, such that (a) the sum of (i) total outstanding consolidated indebtedness less all cash and (ii) total outstanding preferred stock, was divided by (b) Adjusted EBITDA reported for fiscal year 2011, adjusted to reflect the full-year (i.e., proforma) effect of any intra-year acquisitions or dispositions. The Compensation Committee determined that for fiscal year 2011, the range for the net debt/EBITDA component should be as described in the table below. The Compensation Committee set these levels such that the “Threshold” equates to 7.0x leverage, the “Target” equates to 6.8x leverage, the “High” equates to 6.6x leverage and the “Superior” equates to 6.4x leverage or less. For fiscal year 2011, the Company’s debt/EBITDA, calculated in accordance with the foregoing, improved to 6.21x leverage. This resulted in the funding of the debt/EBITDA component at the Superior level for each of the Named Executive Officers.

Individual Performance. The primary objective of this component is to drive individual performance and to ensure accountability with respect to individual performance throughout the calendar year. Mr. CruseMessrs. Arabia, Hoffman and Mr. HoffmanSpringer each had individualized goals for 2010.2011. Mr. Cruse’s personalArabia’s individualized goals included sourcing capital for the Company’s various acquisition initiatives,2011 included completing the refinancing of the Company’s HiltonDoubletree Times Square hotel, developing and implementing a liquidity enhancement and leverage reduction strategy for the Company.Company, and generally becoming

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more acquainted with the Company’s internal systems, personnel and Board of Directors. Mr. Hoffman’s goals consisted of, among other things, completingenhancing the Company’s asset management team, improving the Company’s gross operating profit flow through (which measures the ability of the Company to convert growth in revenues into profitability growth) and developing an initiative to ensure best-in-class operation of our hotels, enhancingmake strategic changes to management at certain Company hotels. Mr. Springer’s goals generally included orienting himself with the Company’s internal month-end hotel review procedures andSunstone organization, refining the Company’s capital expenditure programacquisitions and processes.disposition processes and identifying acquisition and disposition targets.

In determining the Threshold, Target, High and Superior achievement levels, while the Compensation Committee considered information previously provided and recommendations made by Schonbraun,compensation consultants, the Compensation Committee’s determination of these amounts reflected its subjective analysis of the amounts required to appropriately incentivize each Named Executive Officer to achieveachievement of the relevant corporate and individual goals.

The Compensation Committee set targets for the above individual goals such that, as determined by the Compensation Committee, the “Threshold” represents performance at a satisfactory level, the “Target” represents the achievement of a majority of individual annual goals, the “High” represents the achievement of all individual annual goals and the “Superior” represents the achievement of all annual goals and general performance at a level above expectation. For Messrs. Arabia, Hoffman and Springer, the Compensation Committee determined that their performance relative to individual goals ranged between the Target and Superior levels for 2011.

The following is a tabular presentation of the foregoing performance criteria and related achievement levels as determined by the Compensation Committee:

20102011 Awards. To determine the actual incentive awards forpayable to each Named Executive Officer above, in February 2011,2012, the Compensation Committee reviewed and assessed the performance of the Company and each Named Executive Officer in comparison to the subjective and objective performance measures established in 2010.2011. The Compensation Committee determined the extent to which each of the various objective and subjective performance measures were achieved and decided whether the incentive compensation for each performance measure should be funded and, if so, whether funding should be at the Threshold, Target, High or Superior level.

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Cash Incentive Bonuses

The following tables detail the actual calculation of the cash incentive bonus and the equity incentive award with respect to fiscal year 20102011 for each Named Executive Officer who was employed by Sunstone at the end of 2010. Mr. Alter was not entitled to and did not receive a cash incentive bonus or an equity incentive reward with respect to fiscal year 2010. Likewise, in light of his resignation in December 2010, Mr. Buser did not receive a cash incentive bonus or an equity incentive reward with respect to fiscal year 2010. The paragraphs following the tables describe the information contained in the tables below.

Cash Incentive BonusOfficer.