Sunstone Hotel Investors (SHO)

Q4 2011 Earnings Call

February 22, 2012 12:00 pm ET

Executives

Bryan Giglia - Senior Vice President of Corporate Finance

Kenneth E. Cruse - Chief Executive officer, President, and Director

Marc A. Hoffman - Chief Operating Officer and Executive Vice President

John V. Arabia - Chief Financial Officer and Executive Vice President of Corporate Strategy

Analysts

Smedes Rose - Keefe, Bruyette, & Woods, Inc., Research Division

Andrew G. Didora - BofA Merrill Lynch, Research Division

Charles Patrick Scholes - FBR Capital Markets & Co., Research Division

Enrique Torres - Green Street Advisors, Inc., Research Division

Michael J. Salinsky - RBC Capital Markets, LLC, Research Division

David Loeb - Robert W. Baird & Co. Incorporated, Research Division

Presentation

Operator

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Good morning, ladies and gentlemen. Welcome to the Sunset (sic) [Sunstone] Hotel Investors Fourth Quarter and Full-year 2011 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded today, Wednesday, February 22. I'd now like to turn the conference over to Bryan Giglia, Senior Vice President of Corporate Finance of Sunstone Hotel Investors. Please go ahead.

Bryan Giglia

Thank you, Amaryllis. Good morning, everyone, and thank you for joining us today. By now, you should have all received a copy of our fourth quarter's earnings release, which was released yesterday after the close of market. If you do not yet have a copy, you can access it on our website at www.sunstonehotels.com. In addition to our scheduled quarterly release, we also have provided a quarterly supplemental with additional disclosures, including property level operating statistics. The fourth quarter supplemental can also be found in the Investor Relations section of our website.

Before we begin, 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 Ken Cruse, President and Chief Executive Officer; Marc Hoffman, Chief Operating Officer; and John Arabia, Chief Financial Officer. After our prepared remarks, the team will be available to answer your questions. I'd like to now turn the call over to Ken. Ken, please go ahead.

Kenneth E. Cruse

Thanks, Bryan, and thank you, all, for joining us today. On today's call, I'll cover some the high points from our fourth quarter and full-year before reviewing some of the details of our long-term strategy. Marc will then cover operations in detail, and John will discuss our balance sheet, finance transactions and guidance before I wrap up our prepared remarks with a discussion on our priorities with respect to future operating cash flows. So let's get started.

The fourth quarter capped a significant year for Sunstone. By way of highlights, in 2011, as compared to 2010, our corporate revenues grew by 34% to $835 million. Our adjusted EBITDA also grew by 34% to $212.5 million. Our adjusted FFO per share grew 53% to $0.87.

During the year, we added roughly $900 million of high-quality hotels to our portfolio, all of which performed ahead of underwriting in 2011. We also completed over $100 million of capital investments into our existing portfolio in 2011. And we materially refined our corporate governance structure, policies and protocol. And finally, we assembled a new leadership team and developed a balanced and focused strategy.

2011 was clearly a transitional year for Sunstone, and we expect 2012 will be a year in which we build positive momentum. But before we shift to our long-term plan, I'd like to spend a moment drilling down into the details of 2011.

For the fourth quarter, our fourth quarter RevPAR was up 5.9% to $123.36, driven by a 5.3% increase in occupancy, which grew to 72.1%. As expected, due largely to a program change at our Doubletree Times Square and softness in our Washington, Baltimore properties, [indiscernible] for our portfolio in the fourth quarter was essentially flat, up 0.6% as compared to Q4 2010.

For the full year 2011, our portfolio RevPAR was up 7.2% to $123.91. Our 2011 RevPAR growth was driven by a balanced 3.5% increase in rate and a 3.6% increase in occupancy. For the full year, our portfolio occupancy grew to a healthy 74.3%. At these occupancy levels, our operators will be able to continue to increase rates and shift mix to higher rated business as we move into 2012 and beyond.

Throughout the year, we saw a steadily increasing demand. In fact in the fourth quarter, our portfolio's group booking productivity was the highest it's been in 4 years, and our full-year group production was 7% higher in 2011 than it was in 2010.

This stronger productivity translated into solid improvements in 2012 pace, which improved to a positive 4.5% for our entire portfolio during the fourth quarter. And this is a slight improvement over the 4% pace we noted during our third quarter call.

In addition to the strong group pace, we also saw continued success in our negotiated accounts. In many instances, our operators have successfully locked in 2012 negotiated rates at levels that are 3% to 5% above 2012, 2011 levels. And some of our key markets, such as New York and San Diego, we're seeing accounts locked rate increases in excess of 8% above 2011 levels. And in many instances, our operators are successfully eliminating special contract concessions, such as last room availability. This is another solid leading indicator for continued strength in demand and pricing power in 2012 and beyond.

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