Sunstone Hotel Investors Inc (SHO) 2006 Q3 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Sunstone Hotel Investors Q3 2006 conference call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded today, Thursday, November 2, 2006. I would now like to turn the conference over to Ken Cruse, Senior Vice President of Finance. Please go ahead.

Good morning, everyone. Thank you for joining us today. By now, you should have all received a copy of our quarterly press release. If you do not yet have a copy, please contact Bryan Giglia, Director of Finance, at 949-369-4236 or alternatively, you can access the release at our website at www.sunstonehotels.com.

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

We also note that this call contains non-GAAP financial information, including EBITDA, adjusted EBITDA, FFO, adjusted FFO and hotel operating margins. We are providing such information as a supplement to the information prepared in accordance with generally accepted accounting principals. Explanations of such non-GAAP items and reconciliations to net income are contained in our earnings release that we filed yesterday. You can find our earnings release by going to the investor relations section of our website.

With us today are Bob Alter, Chief Executive Officer; Jon Kline, President and Chief Financial Officer and Gary Stougaard, Chief Investment Officer. Bob will provide an overview of the operating and acquisitions environment. John will review the third-quarter and year-to-date 2006 results, discuss financing activities and provide an outlook for the fourth quarter, full year 2006 and a full year 2007 RevPAR estimate. Gary will provide an update of our renovation projects currently underway and during the quarter, including the Hyatt Regency Century Plaza, Orlando Renaissance, Tysons Corner Marriott, the DC Renaissance and other significant projects.

Following their remarks, the team will be available to answer questions. To begin management's discussion, I would like to turn the call over to Bob. Bob, please go ahead.

Good morning, everyone and welcome to our third-quarter 2006 earnings call for Sunstone Hotel Investors. The third quarter of 2006 was another strong quarter for Sunstone. Despite several significant renovation projects that we will detail later in this call, our properties continue to post impressive RevPAR and EBITDA gains. I would like to take a minute to discuss the current operating environment, as well as the current acquisition environment and I will then turn the call over to Jon Kline, our President and CFO, to describe the quarter in more detail and provide updated guidance, as well as Gary Stougaard, our Chief Investment Officer, to update you on our CapEx programs. I will then come back and wrap up.

We have continued to produce strong internal growth on our existing hotel portfolio. Our RevPAR growth and margin improvement has been very impressive and we continue to invest significant capital dollars in our portfolio, including in particular the hotels Ken mentioned; Century Plaza, Orlando Renaissance, DC Renaissance and several other recently acquired hotels. I would like to note that we continue to see strong RevPAR growth from California, our Midwest region and New York.

We continue to execute our extensive 2006 CapEx program. We spent $37 million in the third quarter and have spent approximately $103 million to date. We'll spend another $30 million to $35 million in the fourth quarter readying our portfolio to capitalize on 2007 opportunities. This has led to some temporary disruptions in our operations and corresponding cash flows, but we are confident that it best positions our hotels to drive aggressive growth in '07 and beyond.

We have continued to capitalize on the strong financing markets to improve our balance sheet. During the third quarter, we replaced our $150 million secured facility with a $200 million unsecured four-year facility. We have 100% fixed-rate debt at an average rate of 5.80 and have an average life of nine years. Less than $25 million of our debt matures this decade.

Turning to the acquisitions and dispositions, our acquisition team is out there looking at both off-market and marketed deals. We continue to see a broad range of opportunities; however pricing remains rich. That said, we remain disciplined in our evaluation process and have lost several bids. As long as interest rates remain at historic lows, we do not anticipate any short-term changes in cap rates. We will remain patient and deploy capital when we find an asset or a portfolio of assets that meet our return criteria and increase the overall quality and long-term cash flow growth rate of our portfolio.

On the disposition front, we completed the sale of 13 non-core assets during the third quarter for gross proceeds of $144 million. These hotels did not meet our portfolio criteria and would have required significant deferred CapEx spending in '07 and beyond. The hotels we sold averaged 197 rooms with a $52.71 RevPAR in the first half of '06 compared to the 13 hotels we have acquired since 2005, which average 463 rooms and produced $136.64 RevPAR over the same time frame. Over time, we will continue to recycle hotels and redeploy the proceeds into higher growth assets.

Regarding the Hyatt Regency Century Plaza, we announced in our press release that we have utilized approximately $18 million of the $27 million guarantee. We expect to use the balance of the guarantee during the fourth quarter of '06 and 2007 during the renovation and rebranding process that we are proceeding on. We will then -- Gary will take you through some of the highlights of that renovation. With that, let me turn it over to Jon Kline, our President and CFO, to take you through the numbers.

Thanks, Bob. Good morning. I'd like to cover three topics. First, provide you with an overview of the three months ended September 30. Second, provide a brief update on our balance sheet, investment and financing initiatives. Third, provide guidance for Q4, full year '06, as well as RevPAR for the full year '07.

First topic, Q3. To echo Bob's comment, we're very pleased with the performance of our hotels despite our aggressive renovation schedule and weakness in certain markets. At the corporate level, we were within our guidance on RevPAR, adjusted EBITDA and adjusted FFO per share. For the third quarter '06, our comparable hotel RevPAR for hotels owned during the entire quarter, excluding the four hotels undergoing rebranding and renovation programs, which are the Hyatt Regency Century Plaza, Orlando Renaissance, DC Renaissance and Marriott Tysons Corner, increased 8.4% percent at the midpoint of our guidance of 7% to 9%.

This RevPAR increase was driven by a 6.9% increase in average rate and an occupancy increase up 1.1 occupancy points. In other words, approximately 82% of our RevPAR improvement was from rates.

Including the four hotels that were undergoing rebranding and renovation programs, RevPAR increased 6%. It is important to note that in addition to the four highlighted renovation hotels, several other hotels in our portfolio experienced disruption in the third quarter '06 due to renovation work.

Our top performing region this quarter was the Midwest, which saw 12.5% RevPAR growth, benefiting from a strong performance at both our Embassy Suites Chicago and the Mayo Clinic portfolio in Rochester, Minnesota. The Chicago market has been strong all year and we expect that to continue into the fourth quarter.

The California region continues to post strong year-over-year RevPAR increases. Q3 RevPAR was up nearly 10% over prior year. We continue to see double-digit RevPAR growth at our San Diego and Los Angeles area hotels. The Inland Empire markets have been a little softer.

The middle Atlantic region faced a difficult quarter. Although it benefited from strong performance in New York, weakness in Baltimore and DC offset these gains. We continued to experience softness in the DC market attributable to a weak convention year combined with a historically short congressional session. That said, the DC Baltimore market does account for approximately 16% of our EBITDA and we expect the market to be soft into the fourth quarter, which will impact the numbers we will provide on the fourth quarter.

The Fairmont Newport Beach has been ramping up, but more slowly than we had anticipated. After the incredible $30 million renovation that Gary will describe, we are raising our rates meaningfully, which means replacing a significant numbers of our customers. The Fairmont accounts for nearly $2 million of the shortfall in the guidance we will provide today relative to previously provided guidance.

It is important to note that we have a guarantee from Fairmont that begins in '07. Note however that this guarantee will be received, paid and recorded in the fourth quarter of 2007. We also received, paid and recorded a $750,000 property tax at the Hyatt Regency Newport Beach related to prior periods.

Hotel operating margin for the quarter improved 120 basis points due to increased costs in insurance, property taxes and utilities. Relative to our guidance for the third quarter -- excuse me -- for the third quarter, after adjusting for the 13 property asset sale completed in September, our adjusted EBITDA was $66.1 million, adjusted FFO available to common shareholders per diluted share was $0.62 for the quarter. Adjusted FFO per share grew 19% over last year's third quarter.

On CapEx, we invested $36.7 million during the quarter. Gary will give you more detail on that. As Bob said, again, third-quarter results were negatively impacted by the four significant renovations.

On the expense side, management fee expense was $5.7 million in the quarter, including $2.1 million to SHP, $2.2 million to Marriott, $1 million to Hyatt, $200,000 to Starwood, $100,000 to each of Fairmont and Hilton.

Second topic, balance sheet and financing initiatives. We continued to improve our balance sheet in Q3. With regard to our balance sheet at the end of the quarter, we have approximately $1.5 billion of debt and $191 million of cash on hand, including restricted cash resulting in net debt of just greater than $1.3 billion.

There were three capital transactions that we completed during the quarter, specifically one, credit facility refi. In July, as Bob mentioned, we replaced our $150 million secured credit facility with a $200 million unsecured credit facility. The new facility matures in 2010 with a one-year extension and can be increased up to $300 million.

In addition to being unsecured, the new facility's pricing is based on a grid with spreads that are 25 basis points lower than that of the previous facility. In addition, the unused fee has been reduced by 30 basis points.

Two, forward stock sale. On July 19, we agreed to sell 4 million shares of common stock pursuant to a forward sale agreement with Citigroup. I'd like to reaffirm that everyone understands the mechanics of this arrangement. The agreement has a fixed net price of $111 million to the Company and a fixed number of shares of 4 million. We have the right to settle the agreement at our option at any time through July of 2007 in one or multiple settlements.

When we executed the forward as we disclosed in the prospectus back in July, we were working on the purchase of a large single urban asset and we are hopeful that we would complete the transaction shortly thereafter. For a number of reasons outside of our control, the transaction has taken longer to come together. Although we are still hopeful that we will make the deal. If we are unable to make the deal, there are a number of other interesting opportunities in our pipeline that we are continuing to evaluate and pursue.

Third point, asset sales. In September, we completed the sale of 13 noncore hotels for gross proceeds of approximately $144 million. By divesting 21% of our properties that only account for approximately 5% of our EBITDA, we have been able to redirect management resources toward optimizing our larger, higher growth assets that have a more meaningful impact on the Company. This transaction reduces the geographic distribution of our portfolio from 19 states to 14 states. Since October of '04, we have sold 19 nonstrategic hotels and have acquired 13 high-quality hotels.

I would now like to turn the call over to Gary Stougaard, our Chief Investment Officer, who will provide detail on our CapEx initiatives and I'll come back to give you Q4 and full year '06 guidance as well as RevPAR guidance for '07.

Thanks, Jon. I would like to spend a few minutes to update the status of our 2006 CapEx program and provide some specific details on the status of renovations at the Fairmont Newport Beach, Hyatt Century Plaza and Orlando Renaissance resort hotels, as well as our other major renovation projects.

Our 2006 CapEx plan projected total renovation expenditures of between $130 million and $145 million for the year. Through the end of the third quarter, we continued to be on pace with this plan, having spent $36.7 million in the third quarter for a total of $103 million for the year through September 30.

Included in this amount were 2006 expenditures of $20.5 million at the Fairmont, $14.4 million at the Century Plaza and $10.2 million at the Orlando Renaissance resort. Based upon our current capital expenditure projections for the balance of 2006, we expect to finish the year with total renovation expenditures of $139 million in line with our 2006 plan and guidance.

At the Fairmont Newport Beach Hotel, construction of new exterior pre-function areas and renovations of the porte-cochere driveway and other exterior areas of the hotel were completed during the third quarter. The renovated hotel is the highest quality asset in the marketplace and has been very well received by our guests and the community. As a result, we have begun to see improvements in rate and occupancy in both transient and group sectors. This ramp-up we expect will continue into 2007.

As we discussed in our last call, beginning in 2007, Fairmont will provide an NOI yield guarantee, which will make up for any NOI shortfalls to an 8% NOI yield on our total invested costs for 2007, which guaranteed threshold will increase 9% in 2008 and to 10% in 2009 and thereafter.

Progress with our planned renovations at the Hyatt Century Plaza Hotel continue on schedule. Through the end of September, all 686 standard guestrooms together with 26 suites were completed and returned to service. Renovation of the hotel's 16 remaining suites and all guestroom corridors will be completed by year-end. Lobby and public area renovations are well under way also.

Relocated front desk, bell station and concierge desk are in operation and the construction of the indoor/outdoor bar, concierge lounge and Starbucks Coffee outlet in the north lobby area of the hotel are expected to be complete in the first week of January.

Construction of the Equinox spa and health club began in the third quarter also. Pursuant to our lease agreement with Equinox, this work is being managed by Equinox and is expected to be completed in early January 2007.

Our renovation work with the Orlando Renaissance resort continues in full swing. Replacement of all guestroom soft goods, installation of new dressers and 32 inch LCD televisions and residential style bathroom upgrade in each of the hotels in 780 rooms is complete. Work on the 88,000 square foot atrium, including a new media bar, full-service Starbucks Coffee store and complete makeover of the hotel's three meal restaurant and sports bar outlets is well under way and is expected to be completed in the first quarter of 2007.

Renovation to the restaurant at our Washington, DC Renaissance Hotel was also completed during the third quarter. Renovations in all of the ballroom, meeting and pre-function spaces began in September and will continue into 2007 as occupancy allows.

Renovations at our Baltimore Renaissance Hotel will begin in the fourth quarter of 2006 and continue through May 2007 as hotel occupancy permits. In addition to 32 inch LCD televisions in the 92 concierge level rooms, we've expanded the scope of our renovations to include the relocation of the restaurant and creation of approximately 2700 square feet of new meeting space on the fifth floor and a new lobby level media, coffee bar, cocktail lounge. We have increased the renovation budget at this hotel by approximately $2 million to cover the cost of this additional work.

At the Tysons Corner Marriott, the makeover of the lobby front desk, restaurant and retail areas will be completed in early December. This renovation work includes the expansion of the existing Shula's Steakhouse into a three meal restaurant and will include the conversion of the space previously occupied by the former bar and three meal restaurant into a breakfast buffet area, private dining room and additional meeting space.

At the Embassy Suites La Jolla, our renovation program began this week. The program includes the complete renovation of 337 guestrooms and upgrades to all the hotel's meeting rooms and public spaces. Guestroom construction has begun and will continue through the end of February 2007. Public space renovations will begin late December and are expected to continue through March of 2007.

Progress on the completion of the property improvement programs we received from the brand pursuant to our October 2004 IPO continues on schedule and all of the remaining work related to these [steps] is expected to be completed on schedule by the third quarter of 2007. It's been a busy quarter.

With that, let me turn it back to Jon to give you updated 2006 guidance.

Thanks, Gary. With respect to our outlook and guidance, I will run through fourth quarter and then provide updated full year '06 guidance for the Company. Our guidance does not include any acquisitions or asset sales. For the fourth quarter, we expect RevPAR to increase 7.5% to 9%. Adjusted EBITDA should be approximately $60 million to $63 million for the quarter. Adjusted FFO available to common shareholders should be $31.9 million to $34.9 million and adjusted FFO per fully diluted common share we expect to be $0.51 to $0.56. We expect hotel operating margins to be up 100 to 150 basis points over the fourth quarter of '06. And as Gary said, we expect to spend CapEx between $30 million to $35 million this quarter.

For the full year '06, we expect RevPAR to increase 8% to 9%, increased from our prior guidance of 7.5% to 9%. Adjusted EBITDA should be $250 million to $253 million, which is a good number to use as a run rate because the EBITDA that is related to assets that have been sold is pretty close to the EBITDA for assets that we bought during the year before we bought them.

Adjusted FFO available to common shareholders should be $146 million to $149 million. Adjusted FFO per fully diluted share should be $2.36 to $2.41. CapEx for the year expect to be $133 million to $138 million.

We spoke earlier about Fairmont. I just want it to be clear that of the reduction in our full year EBITDA guidance, roughly $2 million is related to the Fairmont and its slower than expected ramp-up. In addition, Tysons Corner Marriott represents approximately $1.6 million. The DC Renaissance, about $800,000 and the Baltimore Renaissance, approximately $600,000. So you can see that those four hotels account for about $5 million of the $6 million of the reduction in our guidance. With the exception of Baltimore, they are all largely related to renovations.

We are currently in the middle of our '07 planning and budget process. While we are not issuing guidance for '07 other than RevPAR, as Gary said, we do expect several of our renovation projects to spill into '07. Specifically, Century Plaza, Baltimore, Long Beach, Orlando and La Jolla. Again as Gary said, all should be completed by mid '07.

Detailed property level operating budgets have not yet finalized. However, based on preliminary discussions with our managers, as well as a review of the current booking pace, we believe that comparable RevPAR for the full year '07 will increase by approximately 7% to 9%. It is based on this favorable outlook and the fact that these large renovations will be completed shortly that the Board has declared a 6.7% increase in our dividend from $1.20 to $1.28. I would like to now turn the call back to Bob.

Thank you, Jon. When we went public in October of 2004, we told many of you that a very strong advantage the Company had was that we had made a very large investment in our portfolio prior to going public in '03 and '04. This has proved out well and those hotels have done extraordinarily well for the last 18 months.

But now we have experienced more destruction than we anticipated from our '05 acquisitions. We are now going through major renovations, as Gary outlined, in many of our large hotels, which represent a very significant portion of our income. These renovations will clearly position these hotels for very strong numbers in '07, '08 and beyond. We believe the short-term pain of this quarter's numbers coming forward in '04 fourth quarter and maybe the first quarter of -- fourth quarter of '06 and first quarter of '07 will be worth it over the course of '07 and '08. We thank you for your interest in our Company and we would be very interested in answering any of your questions at this time. Thank you so much.

(OPERATOR INSTRUCTIONS). Jeff Donnelly, Wachovia Securities.

Earlier, Bob, you had mentioned that you were looking at kind of a host of transactions out there. I was wondering if you could give us an update on the acquisition market. Specifically has there been a change in either cap rate pricing or per key pricing from maybe a few quarters prior? Then on some of the larger transactions you are looking at, are there any details on them that you can share with us?

No, as a matter of fact, we would love to be sharing details, but at this point, we have nothing that would allow us to announce. As you know, our policy has been to announce acquisitions upon closing. We continue to see a very, very competitive acquisition market. The numbers of properties that our team has looked at and have been the loser in the bidding process is surprising. We continue to see cap rates moving downward. I think that kind of the going numbers now are in the six and seven for the types of properties we are looking for on '07 numbers and quite honestly at our stock price today, it is not very compelling. So we continue to look for hotels in major markets with very strong barriers to entry where we believe that the RevPAR growth over the near term and long term will bring the properties to the levels where they are accretive to our shareholders.

As you know, our disposition was slightly dilutive to our shareholders, but we did that because we truly believe that increasing the quality of our portfolio is very important to our investors and our long-term success. So that is kind of where we are at on the acquisitions.

And I guess maybe another question for Gary. What confidence do you have that the renovation schedule or renovation costs will not slip beyond your current expectations?

Well, I wish I had a crystal ball, Jeff. The one thing I can tell you for sure is that the budget we start with and the budget we end with are going to be two different numbers and it is a weekly -- daily and weekly [action] game to make sure we stay on track both from a budget and schedule and scope perspective.

There are -- and as you get into these projects, you find things that you should be doing and maybe decide some other things you thought were important can be deferred until later. So we are doing our best to stay on track both from a budget and schedule perspective. I think that a lot of the delays that were alluded to earlier are really the result of our making sure that we are working closely with the brands to develop the product that they want to see going forward, particularly in our Renaissance hotels.

Specifically, Jeff, as you know from seeing the renovation at the Fairmont in Newport Beach, as well as the beginning rooms at the Century Plaza, these renovations are complicated and require a lot of planning time and that really has been the reason that many of the Renaissance hotels and others that are coming online and are being renovated fourth quarter and first quarter have slipped maybe six months from the original schedules. But we think at the end, the product is going to be what we want and they are unreplaceable hotels in very key markets. The Baltimore hotel, the DC hotel are very quality, high-end assets in the right places.

I guess just one last I'll call it two-part question. At Century Plaza, I think you guys are looking at getting permits that -- permanently enclosing the outdoor area in front of the hotel. I was curious where you are at with that and is there any update on effort to doing timeshare at the Hyatt in Newport Beach area?

I will let Ken answer the Newport Beach update. Ken has been working on that process.

With respect to the Newport project, we are working through entitlement. We have a development agreement in place so we are not exposed to some of the no growth initiatives that are on the ballot here for the next week in Newport Beach. At this point, we expect to file an information memorandum related to the EIR, the environmental impact report, in the next few weeks. So it is on schedule, but we remain in the process of working through city entitlements and then we need to work through coastal commissions. So I think the schedule is still 18 months or so before we break ground.

On the Century Plaza, we increased the meeting space by a 9200 square foot sprung structure in the plaza area. We are going to review that over the next few years to see how that additional space works out for a long-term modification.

We have done the work, the feasibility work necessary to determine whether we could in fact build another ballroom in that space, but that is really where we have left it.

David Anders, Merrill Lynch.

Hey, Bob, more kind of a conceptual question. You have been around for a long time and do you think we get to the end of this renovation cycle because you are not the only guys renovating and we're kind of hearing the same story from a lot of companies we follow and everybody anticipates that the renovations are going to yield these big results in two years when they are done. But is it possible that we just end up upping the competitive environment for most assets? What is your level of conviction that these renovations are really positive NPV projects versus maintenance CapEx?

Well, I don't want to generalize and I will take each -- you can take each one specifically. In the case of the Fairmont Newport Beach, we had a hotel that was built in 1984 untouched for 20 years and we went in and did a complete rebranding, repositioning and we expect that we now have a, base on our recent appraised value, a very high quality expensive asset that is truly a long way from what we bought in the summer of '04 -- or the summer of '05.

I would tell you that each of the projects we have gone through, I really believe they will create value because a lot of the spaces that we are touching, we are changing and creating more revenue out of those spaces. A lot of the guestrooms had not been touched for a long time in some of these hotels and therefore we're getting a much better product.

Yes, I think it is a little bit of competitive environment whereby all four hotels in a market maybe go through a renovation. But having said that, I think everybody can get strong pricing out of that improvement and it just moves that market up from kind of below where they were supposed to be.

When you look at a full-service hotel, call it a Marriott, a Hilton or a Hyatt, you are talking about a product that should rent in the high $180-$300 range. In many markets, those hotels are getting $125 and $130 and $145. And as you go through these renovations, even if the whole market goes through renovations, I think everybody who is making this investment will move their rates up. So I think from a profitability standpoint, I think each of these investments will be very well, very solid return on investments.

We have shown I think in one of our last presentations that we get kind of 30% return on our invested capital on these renovations. After taking out just the growth in the RevPAR, they still created additional RevPAR growth in the market. We've created additional RevPAR.

Okay, thanks. Jon, is there any more details you can share with us on the property acquisition? It sounds like you are hedging yourself at this point in time that if the large transaction that you have alluded to may not occur. Is there any other color you can give us on that?

Unfortunately I can't. There are a couple of complicating factors that make it not entirely with our control whether the deal is going to make it or not, but we will know relatively shortly one way or the other.

Just to go back to the question you had asked Bob. While arguably it is a game of leapfrog here and as each -- if you go around the market and properties renovate, two of the Renaissance hotels that we closed on a little over a year ago were renovated last year in terms of their rooms; the Westchester White Plains Hotel and Long Beach and those two hotels both have RevPAR growth north of 20% year-over-year. So you clearly get a benefit financially from a renovation and hopefully it is not just an amenity creep game where you raise the cost of entry for everybody.

Jeff Randall, AG Edwards.

Bob, maybe you could talk a little bit about the slow ramp at the Fairmont and what that specifically related to and what you guys are doing to rectify it going forward?

There is really two aspects of it. When we originally embarked upon the renovation, we anticipated that we would be pretty much complete in the first quarter. The rooms actually -- the rooms and lobby actually opened in May and then the exterior renovation and pool and driveway and outside function space opened in September.

When we did our budget and our forecasting, obviously we were anticipating earlier completion and therefore having more time to ramp up. As that progression of delay caused the ramp-up to be delayed as well and that really came in and affected our numbers much more dramatically in the third quarter than we thought.

In terms of the sales and marketing, Fairmont has been aggressively selling the property, doing property tours. We held a fabulous grand opening party in September attended by over 800 customers in the marketplace. We think that the buzz locally has been dramatic. We are booking a lot of good quality accounts and we believe that '07 is going to be a dramatic RevPAR gain year-over-year in the neighborhood of -- what is the RevPAR going to be? $70 improvement or something like that? A huge improvement in RevPAR as a result of that.

That coupled with the original transaction of bringing in Fairmont where they gave us a guarantee of a certain return for a multiple year period and that starts at the beginning of '07 because we all knew that '06 was going to be a difficult year. We just were more optimistic than we were actually able to put together.

There's two strategies we could pursue. One is fill the rooms and then try and raise the prices as we go and the other one is to really try and maintain rate integrity and price the product where it belongs, which is at the top of that market. That is obviously the longer-term approach and it is the approach we have decided to take. So it really is a function of shifting out customers and the fact that in another eight weeks we have full financial protection from Fairmont. A part of our thought process in working with Fairmont and deciding on that strategy, but we think it is the right place for this hotel to position itself for the long-term value.

I know it is immaterial, but, Jon, could you just explain the $800,000 addback to FFO for the supplemental property tax? I guess forgive me, but it looks like somewhat of a bogus addback to hit the low end of the guidance.

Okay. We got a bill in July, which was a reassessment as you know. California has something called Prop 13, which basically says properties get reassessed upon sale. This property was purchased in December '02 as part of a 13 property package and basically the taxing authorities took issue with our value allocation and sent us a bill for '02 through '04, which we are contesting and it will take quite some time here, but we think we are going to get a decent amount of that back. The reason we showed it as an adjustment is because it doesn't relate to the current period.

Doesn't relate to any time since we have been public basically. It is been an '05, '06 number. The tax bill goes from '03 and '04. So that is why we don't agree with your characterization of that.

Fair enough. Maybe talk just a little bit about -- at the Tysons Corner hotel. I thought that was going to be a less than $5 million renovation, not very invasive with respect to the guestrooms and I guess I was surprised to see it show up as being excluded from the comp set. That market is weak. How do we parse out really what is related to the weak market and what is related to renovations there? What compelled you guys to take it out of the comp set given that from my knowledge it didn't appear that the renovation work was to be that invasive?

Let me speak to the nature of the renovations first and then I will let Bob, Jon and others speak to why we excluded it. Basically, we closed the front door of this hotel.

We did all the rooms last year. (multiple speakers) rooms, the product is done.

The rooms were done. The rooms product really hasn't been affected at all this year, but the front door has been severely impacted and the ability for guests to use the public areas of the hotel has been impaired. As a result, we have seen some -- we've had some attrition here. We think once this is all done and the lobby and the restaurant are back open and operating, our customers will come back.

And this was a project that creeped through the design stage. When we first anticipated the project, we were closing a restaurant and a bar, building private dining rooms and expanding the Shula's to three meals a day. During that process, we were going to do a cosmetic on the lobby. As a result of Marriott's updated design program, the great room concept got introduced and we decided that it made sense as long as we were doing this renovation to incorporate the great room concept into this renovation.

That took us a lot of time because Marriott was first kind of coming together with what the great room concept was and we are going to be one of the first ones out of the box to have it. We think long term it is the right thing for the Tysons Marriott, but we basically had to totally blow up the lobby and the front access to the building, as well as a piece of the restaurant. So in a transient hotel, your customers come for a while and as soon as the renovation gets too disturbing, they move along and go to other hotels. We obviously expect that to be finished here in the fourth quarter and expect '07 to come booming back with a great new product.

Okay. Jon, could you just comment on the ADR and the occupancy year-over-year changes for the total portfolio? I know you guys published the comparable, but it would be helpful if we could see just that same data on a portfolio-wide basis as well. Do you have that handy?

Not sure I understand your question.

You said the RevPAR growth was 6% portfolio-wide. I am just wondering if you can give us the ADR and the occupancy component to that.

I don't have that in front of me. We can get back to you with it.

Okay. And lastly, the 7% to 9% outlook for '07, is that the full portfolio expectation or is that based on some I guess pro forma portfolio where you're excluding hotels for renovation?

No, that is the whole portfolio. The 7% to 9% is including renovation disruption. We in fact internally have a slightly higher number than that, but we are anticipating some renovation hitting us in the first quarter and we have built that into our number.

Will Truelove, UBS.

Just to follow up on that RevPAR question. In terms of margins, normally if you are doing -- most companies would say if you're doing 7% to 9% RevPAR growth next year, that would be around a 150 basis point improvement. What kind of total portfolio margin improvement would it be given that you're also including renovations in that? Is it lower than -- is it around 100, or how should we think about margins next year?

We reported 120 for the third quarter, and we have not completed all of our budgets. As you know, more than about half of our portfolio is third-party brand managed outside of Sunstone Hotel properties. Those budgets from the brands are not finalized, so we don't have kind of margin improvement yet. When we get to the fourth-quarter call and release those numbers in early February, we will give you kind of complete '07 guidance including margin improvement.

Then just two easy questions. I know you mentioned that roughly 16% of the EBITDA is out of Washington, D.C. Post these kind of asset sales, what are your next like largest four or five markets and what kind of EBITDA do they represent now?

Well, our biggest market is Southern California and if you combine San Diego and Los Angeles, it represents --.

It's about one-third of our EBITDAR, Will.

-- about one-third.

Southern Cal, and then the Northeast which basically is D.C. Baltimore, Philly, New York is around one-quarter.

Okay. And then lastly, just a little more detail on the Fairmont. You said that it would be a fourth-quarter catch-up if they don't make the guarantee; is that correct?

Fourth quarter '07.

Fourth quarter '07. Right. Yes. And that is on the 8% of the invested capital on the hotel?

Yes. 8% on total investment.

That total investment is running roughly what right now?

We think it is 100 --

It's about $105 million. If you call it $8 and change million. That's NOI. Then you add back an FFE reserve, you will get to kind of an EBITDA number for '07. But again just to be clear so there is no confusion later that check, if it comes from Fairmont, will be a fourth-quarter revenue item.

So when we give you our guidance, we're going to give you quarter-by-quarter. We are going to be giving you basically the actual numbers for the first three quarters and then the fourth quarter, we are going to give you the annual number, including that guarantee payment.

And that would be the same for the following year. It's always in the fourth quarter for that guarantee, correct?

Correct.

Sounds good. Thanks.

Any other questions?

David Richter, ABP Investments.

My question has been answered thank you.

Jeff Randall, AG Edwards.

Just in terms of the renovations looking into I guess the fourth quarter and the first quarter of next year, have you guys looked at quantifying that in terms of room nights lost or anything in terms of visibility on maybe which hotels would be excluded from the comp set in the fourth quarter? If you could give any color on that, that would be great.

I don't think we can do anything more than what we have told you so far. We have given you kind of fourth-quarter guidance. That guidance anticipates the renovations. In terms of what we have built into our models for lost room nights, I think we don't want to get into that level of detail.

And just to add to that, we always give the full number for everything. So we just are highlighting the number excluding a couple of these major renovations because we think it is a number that is helpful to people to get to a run rate, which to me is what really people should be focused on in terms of building what our future cash flow generating capability is and that is why we give you both numbers. But we always have and will continue to give you the number without any adjustments to it.

Smedes Rose, Calyon Securities.

I wanted to get a little more color on the Washington, DC market. I think it is pretty well documented now that the congressional calendar was shorter this year, but I am curious about activity at the Convention Center this year and what you are seeing for next year just given that your hotel is right near that. Also is there any update -- I think there is supposed to be a Marriott sort of anchor convention hotel built there. Do have any sense of timing around that or if it is moving forward?

I believe that Marriott is in planning, has been moving forward. The last date I heard was opening in 2010. I don't know whether they can still make that date considering they have been delayed. It is going to catty-corner to our hotel by the convention center. Obviously having Marriott manage both of those hotels as we have seen in a lot of different other cities we think is a real positive in terms of the way that this will help the DC rent.

In terms of actual convention calendar for '06 and '07 -- Ken, can you give us some color?

I don't have the numbers right in front of me, but this year was a down convention year in addition, as you mentioned, to the Congress being in session a variable number of days. I believe the number for next year is slightly higher. I think it was 15 this year and 17 next year. I want to make sure.

City-wide.

City-wide conventions. I want to make sure that that is an accurate number. Our hotel also is projecting decent in-house groups for next year, a meaningful improvement over this year in terms of their pace. So we are encouraged by the market on a year-over-year comparison for DC.

And then Jon, are there any other -- I realize it is probably sort of a minor number, but are there any other property tax assessments given this Proposition 13 you are talking about in how many properties you have in California? Is that something that we should be looking for given your acquisition activity there or do you think you'll be challenged on your valuations?

We do individual acquisitions. It's easy to figure out what the property tax will be. Really the issue that arose with respect to the Hyatt Newport Beach is a function of that property being acquired as part of a portfolio and the government challenging our allocation.

In fact, all of the other hotels that we have acquired since '05 have been one by one. So it is easy to take the purchase price and come up with the property tax bill for that and we have a person that works on that extensively. In this case, we got surprised because they said even though you allocated this number, we don't believe that is the right number for that asset and we are protesting that.

I think that covers my questions. Thank you.

Kamaldeep Manaktala, Bear Stearns.

Good morning. You guys talked about renovation disruptions going through mid '07. I know you are not providing any formal guidance for '07 and maybe I missed it, but how do we think of the impact from renovation disruptions in '07 relative to '06? Is it significantly different, lower, higher?

The answer is we don't know yet. As Bob said, we have basically finalized the budgets on our 34 hotels that are managed by Interstate, but we are still in the process of finalizing our budgets on the 16 brand managed hotels and the lion's share of the renovation/disruption is on those hotels. So we will be finalizing that over the next 30 days and we will speak specifically to '07 on our next call as has been our past practice.

If there are no other questions, we thank everybody for your participation and look forward to updating you further on our Company's results.

Thank you. Ladies and gentlemen, this concludes today's teleconference. Thank you for participating. You may now disconnect.