Sunstone Hotel Investors, Inc. (SHO)

Q2 2010 Earnings Call Transcript

August 6, 2010 12:00 pm ET

Executives

Bryan Giglia – SVP, Finance

Art Buser – President and CEO

Ken Cruse – EVP and CFO

Analysts

Patrick Scholes – FBR Capital Markets

Smedes Rose – Keefe, Bruyette & Woods

Josh Attie – Citigroup

Bill Crow – Raymond James

David Loeb – Robert W. Baird

Joe Greff – JPMorgan

Michael Salinsky – Royal Bank of Canada

Chris Woronka – Deutsche Bank

Jeffrey Donnelly – Wells Fargo

Presentation

Operator

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Good morning, ladies and gentlemen, and welcome to the Sunstone Hotel Investors second quarter earnings conference call. At this time, all participants are in listen-only mode. Following today’s prepared remarks instructions will be given for the question-and-answer session. (Operator instructions) As a reminder this conference is being recorded today Friday, August 6.

I’d 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, Alicia and good afternoon, 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 would 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.

I’d like to turn the call now over to Art. Art, please go ahead.

Art Buser

Bryan, thanks and good morning, everybody. Thanks for joining us today. During today’s call we’ll provide you with a detailed review of the second quarter results as well as emerging demand and operating trends. Finally, Ken is going to provide additional detail on our balance sheet.

So starting with current operations update, again all the figures I’ll discuss today are pro forma for our 30 hotel portfolio including the Renaissance Westchester on a pro forma basis. Pro forma adjusted EBITDA for the second quarter was $39.9 million and adjusted FFO per share was $0.18. Again this number is pro forma as if we owned Westchester for the entire quarter.

Please refer to our earnings release for a reconciliation of pro forma, adjusted EBITDA and adjusted FFO and FFO per share to net income which are both above Street consensus. Second quarter, our total portfolio RevPAR, pro forma for our 30 hotel portfolio was up 6.8% to prior year, occupancy increased 3.4 points and rate was up 1.8%; year-to-date RevPAR is up fraction of a percent above last year.

We’re continuing to see strength from our gateway market hotels Hilton Times Square, Marriott Boston Long Wharf, Renaissance Baltimore all turned in double-digit RevPAR growth in the second quarter.

In terms of regional performance, our California properties were up 2.3% in RevPAR, L.A. Orange county area hotels were down a fraction when compared to ‘09, while our three San Diego area hotels Embassy Suites La Jolla, Del Mar Hilton, Del Mar Marriott were up 9.5% in 2009 second quarter.

Our other West region was up approximately 1% compared to last year. The Hilton Houston and the Portland Marriott were able to show significant RevPAR growth with 6.9% and 7.1%, respectively.

We continue to see the Eugene Valley River Inn in Park City Marriott struggled with RevPAR growth. The Midwest region was up 6.2% for last year, Minneapolis and Chicago both posted double digit RevPAR growth for the quarter.

Finally, our East region was up 9.9% for the second quarter, D.C. up about same amount, New York City and Boston continue to outperform with RevPAR gains of 14.6% and 12.4%, respectively. New York City and Boston continue to be leading indicator markets.

Our Hilton Times Square generated 47 sell-out nights during the second quarter compared to 18 sell-out nights during last year. Additionally, during the second quarter, our Hilton Times Square realized on 78 out of 91 days in Q2 a higher average rate in the same day in 2009.

Like New York, Boston also continues to demonstrate an impressive recovery over 2009. Our Marriott Boston Long Wharf had 46 sell-outs in Q2 2010 compared to 15 same quarter 2009, and realized 54 nights with higher average rate in Q2 than the same day in 2009.

Our D.C. area hotels are performing admirably as well. And the Renaissance D.C. and Marriott Tysons Corner have RevPAR growth of 8.3% and 15.4% respectively attributed to increases in both ADR and occupancy.

Our asset management team and operating partners achieved great margins in light of growing occupancy with a meaningful rate growth. Hotel operating margins were up 70 basis points for the quarter and RevPAR increases of again 6.85%. Q2 margin performance was negatively impacted by attrition revenue of 1.5 million booked during Q2 2009 compared to 300,000 booked in Q2 2010. Adjusting for the attrition income, margins would have been up 120 basis points in Q2.

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