Sunstone Hotel Investors CEO Discusses Q3 2010 Results – Earnings Call Transcript

Sunstone Hotel Investors, Inc. (

SHO

)

Q3 2010 Earnings Conference Call

November 4, 2010 12:00 PM ET

Executives

Bryan Giglia – SVP, Finance

Art Buser – President and CEO

Ken Cruse – EVP and CFO

Marc Hoffman – EVP and COO

Analysts

David Loeb – Baird

Joe Greff – JPMorgan

Dennis Forst – KeyBanc Capital Markets

Shaun Kelley – Bank of America Merrill Lynch

Ryan Meliker – Morgan Stanley

Chris Woronka – Deutsche Bank

Josh Attie – Citigroup

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the Sunstone Hotel Investors Third Quarter Earnings Call. (Operator Instructions)

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Previous Statements by SHO
» Sunstone Hotel Investors, Inc. Q2 2010 Earnings Call Transcript
» Sunstone Hotel Investors, Inc. Q1 2010 Earnings Call Transcript
» Sunstone Hotel Investors Inc. Q4 2009 Earnings Call Transcript
» Sunstone Hotel Investors, Inc. Q3 2009 Earnings Call Transcript

I would now like to turn the conference over to Mr. Bryan Giglia, Senior Vice President of Corporate Finance of Sunstone Hotel Investors. Please go ahead, sir.

Bryan Giglia

Thank you. Good morning, everyone and thank you for joining us today. By now you should have all received a copy of our earnings release, which was released this morning. If you do not yet have a copy you can access it on the Investor Relations section of our website at www.sunstonehotels.com.

Before we begin this conference, I’d like to remind everyone that this call contains forward-looking statements that are subject to risks and uncertainties including those described in our prospectuses, 10-Qs, 10-Ks and other filings with the SEC which could cause actual results to differ materially from those projected. We caution you to consider those factors in evaluating our forward-looking statements.

We also note that this call may contain non-GAAP financial information including EBITDA, adjusted EBITDA, FFO, adjusted FFO and hotel EBITDA margins. We are providing that information as a supplement to information prepared in accordance with Generally Accepted Accounting Principles.

With us today are Art Buser, President and Chief Executive Officer; and Ken Cruse, Chief Financial Officer.

To begin today’s call; I’d like to turn the call over to Art. Please go ahead.

Art Buser

Bryan, thanks a lot. Good morning, everybody. Thanks for joining us today. During today’s call, we’ll provide you with a detailed review of the third quarter results as well as emerging demand and operating trends. Finally, Ken will provide additional detail on our credit profile.

Recent finance transactions and certain refinements we’ve recently made to our liquidity and leverage [inaudible]. All RevPAR margin figures I’m going to discuss are pro forma for our 30 hotels portfolio excluding the Royal Palm Miami Beach, which we acquired during the third quarter and which is in the planning stages of a major renovations set to commence during the fourth quarter. Adjusted EBITDA and adjusted FFO per share reflect the operation of the Royal Palm for our period of ownership.

Adjusted EBITDA for the third quarter was $38.9 million and adjusted FFO per share was $0.14. Please refer to our earnings release for a reconciliation of pro forma, adjusted EBITDA and adjusted FFO and FFO per share to income available to common stockholders.

For the third quarter, our total portfolio RevPAR came in slightly higher than previously announced at 3.3% above prior year. Occupancy decreased one point and average daily rate was up 4.8%. Third quarter margins were flat for the last year.

It’s important to note that the third quarter margins were negatively impacted by one-time cost associated with the implementation of Marriott’s Sales Force One, approximately $358,000. Excluding this non-recurring expense, margins for our comparable 30-hotel portfolio would have increased by 25 basis points.

Though Sales Force One implementation charge, Marriott has assured ownership, this represents an investment which will garner a strong long-term return. So far, there had been some growing pains as you’d expect with any major process change. We are watching performance very closely and will verify if we are indeed receiving a return on our investment.

Year-to-date RevPAR through October is up 1.8% to last year. Year-to-date, we continue to see strength from our gateway market hotels.

Let me switch over to regional performance. In terms of regional performance for the third quarter the year-over-year growth in RevPAR for L.A. Orange County and our La Jolla and Del Mar, all grew at the same rate 6.9% year-over-year as compared to the third quarter 2009.

Now, we’ve mentioned volatility in growth trends during prior calls. During the third quarter, we saw such volatility in our West region which was down 7.1% compared to last year. Portland Marriott was up 15% on RevPAR compared to third quarter 2009, but this strong growth was offset by continued weakness in Houston and Park City, both of which were down 10%. We expect continued weakness at our Houston properties into 2011 due to loss of a significant piece of annual government business.

Our Midwest region was up 3.8% to last year driven by double digit growth in Minneapolis and positive ADR growth in Chicago.

Finally, our East region was up 3.5% for the third quarter. Our growth trend, which as we previously indicated was muted by shifts in group business and difficult comps at three of our largest hotels Renaissance D.C., Renaissance Orlando and Renaissance Baltimore. We expect double digit RevPAR at both Orlando and Baltimore and high single digit growth at D.C. during the fourth quarter.

New York City and Boston continued to outperform turning in RevPAR gains of 8.1, 6.1% respectively third quarter. But putting some perspective in excluding our three convention hotels again D.C., Baltimore and Orlando and our two Houston hotels, all of which were negatively impacted by either difficult comps or loss of government contract, our third quarter RevPAR for our portfolio would have been up 6.2% and the margins would have been approximately 90 basis points higher.

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