Sunstone Hotel Investors Inc (SHO) 2006 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Sunstone Hotel Investors fourth quarter and full year 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, February 8th, of 2006. I would like to turn the conference over to Mr. Brian Giglia, Vice President of Corporate Finance of Sunstone Hotel Investors. Please go ahead, sir.

Thank you. Good morning, everyone and thank you for joining us today. By now you should have all received a copy of the corresponding earnings release. If you don't yet have a copy, please call my office at 949-369-4236 or alternatively, you can access it on our web site 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 contained in our prospectuses, 10Qs, 10Ks and other filings with the SEC which could cause the 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 nonGAAP financial information, including EBITDA, adjusted EBITDA, FFO, adjusted FFO and hotel operating margins. We are providing that information as a supplement to information prepared in accordance with generally accepted accounting principles. Explanations of such nonGAAP items in reconciliation to net income are contained in our earnings release that we filed yesterday.

With us today are Bob Alter, Chief Executive Officer, Jon Kline, President, Ken Cruse, Chief Financial Officer, and Gary Stougaard, Chief Investment Officer. Our CEO Elect, Steve Goldman is joining us on the call today. Bob will provide us an overview of the operating and investment environment. Jon will provide of the fourth quarter and full year 2006 results. Gary will provide an update on our current Capex projects and Ken will provide Q1 and full year 2007 guidance. 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 the fourth quarter 2006 earnings call of Sunstone Hotel Investors. First, let me welcome our newly appointed CEO, Steve Goldman to his first Sunstone earnings call. Although Steve will not be assuming the duties of CEO until March, he's on the call today and will be available during question-and-answer session.

Let me take a minute to highlight our recent operating performance, discuss the current operating environment and provide an update on our acquisitions and disposition activity. The fourth quarter of 2006 was another strong quarter for Sunstone.

During the impact of our significant rent foe vacation projects, we outlined on our previous call our properties continued to post impressive RevPAR and margin gains.

Full year comparable RevPAR increased 8.7% over the prior year. Total revenue was up 54% over the prior year to $903 million and adjusted corporate EBITDA was up 51% to $252 million. I note here that when we became public our estimate was $141 million. In 2006, we continued to invest heavily in our portfolio. Completed another $139 million of Capex.

In 2007, we expect to spend another $120 million to $130 million improving our portfolio and positioning our assets for above market future growth. Gary will provide more detail on the major 2007 projects later in the call. Throughout 2006, we experienced renovation-related disruption and anticipate some disruption to continue throughout the first half of 2007. When all of our major renovations are scheduled to be complete. This disruption has been included in our 2007 guidance.

We have continued to capitalize on the strong financial markets -- financing markets to improve our balance sheet. We ended the year with essentially 100% fixed rate debt and an average rate of 5.8%, with an average life of approximately 8.5 years. Less than $25 million of our debt matures cumulatively in '07, '08 and '09.

Turning to acquisitions and disposition. It has been a very productive year. In 2006, we acquired five assets for approximately $570 million.

This includes our investment in the Doubletree Times Square joint venture with Whitehall. In January we completed our first acquisition of 2007, out at the Los Angeles International Airport Renaissance. As for the current acquisitions environment, we continue to see a large number of hotels being markets and pricing remains rich.

That said, we have remained disciplined in our evaluation process and have lost numerous bids to more aggressive buyers. As long as the interest rates remain at low levels and pro forma growth rates remain robust, we do not anticipate any meaningful changes in cap rates. With global hotel real estate acquisitions up 63% in 2006, to $72.5 billion according to Jones Lang LaSalle, and whole periods declining to 18 to 24 months, strong deal flow will likely continue through 2007 and into 2008.

Largely driven by opportunity funds, nontraditional offshore capital sources and high net worth buyers. That said, we will remain patient and disciplined and deploy our capital, only when we find assets on a pro forma basis will generate an IRR in excess of 100 to 300 basis point spread to our adjusted weighted average cost of capital, which will increase the overall quality of our portfolio.

On the disposition front, we sold 15 hotels in 2006 for gross sales proceeds of $179 million.

These hotels did not meet our portfolio criteria and many would have required significant deferred Capex spending in 2007. The hotels we sold averaged 186 rooms and an average RevPAR in 2006 of just $57, compared to the five hotels we acquired in 2006, which average 356 rooms and $203 in RevPAR. Times Square certainly helped that.

Over time, we intend to continue to recycle noncore hotels and redeploy the proceeds into higher growth assets. With with that, let me turn it over to Jon Kline, our president, to take you through the growth initiatives and the fourth quarter and full year 2006 results.

Thanks, Bob, and good morning. I'm very pleased with our performance in the forth quarter. At the corporate level, we were at the high end of our range for RevPAR, adjusted EBITDA, adjusted FFO and adjusted FFO per share.

For the fourth quarter our comparable hotel RevPAR for hotels owned during the quarter, excluding the four hotels undergoing major rebranding and renovation programs, which are the Century Plaza, the Renaissance Orlando, the Marriott Tyson's Corner and the Embassy Suites La Jolla, so excluding those four, our RevPAR increased 9.7%, above the high end of our guidance of 7.5% to 9%. This RevPAR increase was driven by a 5.8% increase in rate and an occupancy base of 250 basis points. In other words, approximately 60% of our RevPAR improvement was from rate.

RevPAR for the full portfolio, including those four hotels increased 7.1%, which was 70% driven by rate. This compares very favorably to total U.S. RevPAR increase which was 6% in the fourth quarter according to Smith Travel.

Our top performance region was California, which saw north of 16% RevPAR growth. Benefiting from our San Diego hotels, which posted almost an 18% growth over the prior year.

In addition, the L.A.X. market was up north of 20%, Manhattan Beach, Napa and Riverside also realized double digit RevPAR gains.

The midwest region also posted double digit RevPAR growth for the quarter as a result of Chicago's banner year and our success at The International, our five-star hotel within a hotel at the Kahler Grand in Rochester.

The mid-Atlantic region faced a difficult quarter. Our New York hotels continue to press impressive year-over-year RevPAR, but the softness in the D.C./Baltimore market partially offset these gains.

As we said on our last call, we expected softness in D.C., in Q4 and anticipate improved results this year in '07. Hotel operating margin for the quarter improved 110 basis points within the range of our guidance of 100 to 150 basis points. For the quarter ended December '06, our adjusted EBITDA was $62.2 million, above the midpoint of our guidance. Adjusted FFO per share was $0.56, at the high end of our guidance of $0.51 to $0.56. On Capex we spent $36.5 million during the quarter.

On the expense side, our management fee expense, including incentive management fees was $7.3 million, slightly less than 3% of gross revenue, including $2 million to SHP, and $3.9 million to Marriott, $1 million to Hyatt, $200,000 each to Starwood and Fairmont, and $50,000 to Hilton.

The full year '06. Our comparable RevPAR, as Bob said, increased 8.7%, as compared to 7.5% for the nation under Smith Travel. This was almost entirely driven by rate. Adjusted EBITDA was $252.1 million, above the midpoint of our guidance of $250 million and $253 million and adjusted FFO per share was $2.41, at the high end of our guidance of $2.36 to $2.41.

We invested $139.4 million of Capex during the year. Management fee expense for the year was $27.5 million. With regard to our balance sheet at the end of the quarter, we had approximately $1.5 billion of debt and $95 million of cash on hand, including restricted cash.

Fairmont Newport Beach is ramping up nicely. December was the first month post renovation with positive cash flow. As a reminder, we had heavy renovations during the first half last year, in particular. RevPAR in the first quarter of last year at that hotel was $32. We expect it to be about $110 this quarter.

Century Plaza has also performed very well post renovation. In fact, RevPAR in January is up 21% over last January.

Let's touch on one other point, growth. On the internal growth side, we have cranked up the dial on our asset management initiatives. Mark Hoffman and I had an off-site session last week with all of our general managers to share best practices.

A couple of the things we discussed, the better ideas include: one, selling groups during a renovation, two, installation of a chef's table as a closing room. Three, we talked about some advanced search engine optimization techniques. And, four, we talked about off peak revenue management strategies. From the standpoint of external growth, as Bob touched on, we continue to look at a range of very interesting acquisitions, but remain disciplined and will only buy where it adds to the quality of our portfolio, as well as our long-term cash flow growth rate.

With that, I would like to turn it over to Gary Stougaard, our Chief Investment Officer, who will provide details on our Capex programs. Then Ken will give you Q1 and full year '07 guidance.

Thanks, John. I'll spend a few minutes to update the status of our renovations and provide some specific details on the status of renovations at The Hyatt Regency Century Plaza, The Embassy Suites La Jolla, Renaissance Orlando Resort, Renaissance Baltimore and Long Beach hotels together with our other major renovation projects.

During the fourth quarter we spent $36.5 million in renovation costs. Included in this network were expenditures of $9.3 million at Century Plaza $4.3 million in the Embassy Suites La Jolla and $4.2 million at the Orlando Renaissance Resort.

As both Bob and John indicated earlier, including these amounts we finished 2006 with total renovation expenses of $139.5 million. We expect the approximate $35 million to $40 million quarterly capital expenditure pace to continue into the first half of 2007, then slowing down in the second half of the year as we complete most of our major renovations projects and brand [inaudible] requirements. As Bob mentioned earlier our projected full year capital expenditures will be between $120 million and $130 million.

Our renovations at The Century Plaza are nearly complete. All of the guest rooms and suites have been renovated and returned to service. The relocated front desk, bell station and concierge desk are now fully complete and the construction of the X bar, The Century Plaza and Regency Club and the full-service Starbucks Coffee outlet in the north lobby area of the hotel will be completed late this month. In addition, construction of the Equinox Spa and Health Club has been completed and the club will begin full operations in the next two weeks. Pursuant to our lease agreement with Equinox, we are required to fund approximately $4 million of the $6 million total construction renovation costs incurred by Equinox.

Our renovation program at the Embassy Suites La Jolla Hotel began in November. The program included the complete renovation of 337 guest rooms and upgrades to all of the hotels meeting rooms and public spaces. Guest room renovations are expected to be completed in early March of this year.

The first phase of the public space renovations will begin and be completed in the second quarter 2007, with the balance of the public area work deferred until later in the year to minimize the impact on hotel operations.

Our renovation work at the Orlando Renaissance Resort continues in full swing. The replacement of all guest rooms, soft goods and the installation of new dressers and 32-inch LCD TVs and residential style bathroom amenities in each of the 780 rooms is complete. Work in the 88,000 square foot atrium, including a new media bar and a full service Starbucks coffee store and the complete makeover of the hotel's three-meal restaurant and sports bar continues, which work is expected to be completed early in the second quarter of this year.

Renovations at our Baltimore Renaissance Hotel began in the fourth quarter of 2006 and are expected to continue through May of this year. The scope of our renovations include the creation of a new restaurant and bar and approximately 2,700 square feet of new meeting space on the fifth floor, together with a new media coffee bar, cocktail lounge and extensive entry, lobby and lounge renovations on the ground floor.

At the Long Beach Renaissance Hotel, construction began in November on the first phase of our $8.5 million renovation plan for this property, including a new lobby, restaurant bar and lounge and new full service Starbucks outlet, in addition to extensive exterior and [inaudible] share improvements, which are all scheduled for an early April completion. The second phase of this work, the conversion of the existing bar and fine dining restaurant into a new 4,500 square ballroom will commence in the second quarter and expected to be completed in state September.

At the Tyson's Corner Marriott, all Corner planned renovations, restaurants and retail areas of the hotel, including the expansion of Shula's Steakhouse into a three-meal restaurant have been completed to service. We continue to work towards the completion of the remainder of the property improvement programs we received from the brands pursuant to our October '04 IPO and all of this work is expected to be completed by the end of the third quarter of 2007.

With that, let me turn it back to Ken to give you the first quarter and full year 2007 guidance.

Thank you, Gary, and good morning, everybody. With regard to our outlook and guidance, I will run through the first quarter and provide full year '07 guidance for the company. I also want to discuss significant moving parts with respect to 2007 and review some forward indicators with you.

I will try to do this quickly so we can all get off the phones and start buying our stock. First, with respect to guidance. For the first quarter we expect comparable RevPAR to increase between 7.5% and 9%. And adjusted EBITDA should be approximately $56.8 million to $58.8 million. Adjusted FFO available to common shareholders should come in at approximately $26.9 million to $28.9 million, and we expect that adjusted FFO per fully diluted common share to come in between $0.43 and $0.46.

In Q1 we see hotel operating margins as coming in relatively flat over the first quarter of 2006, obviously this is well below our target flow through rate. This short-term underperformance should be isolated to the first quarter and is primarily the result of renovations, minimum wage increases and one-time year-over-year increase in property taxes, related to recently acquired hotels.

Also during the first quarter we expect to invest between $35 million and $40 million in capital projects as we progress towards the completion of the bulk of the renovation program Gary just discussed.

For the full year 2007 we expect RevPAR to increase between 7.5% and 9.5%, this is a 50 basis point increase to our prior guidance of 7% to 9%. We expect adjusted EBITDA to come in between $288 million and $298 million.

Adjusted FFO available to common shareholders to be between $168.8 million and $178.8 million, and adjusted FFO per fully diluted share to come in between $2.65 and $2.80. We expect 2007 margins to increase by 100 to 150 basis points over 2006.

Again, 2007 margins will see some pressure from year-over-year increases in property tax, up about 8.6%, health insurance up about 10.6%, and salaries and wages up 6.8%.

With that said, workers comp costs are expected to increase only about 2% in 2007, which is a positive sign that workers comp rates, especially those in California, are moderating. Also, as Jon discussed, we expect to see continued success in our overhead and operating costs across our portfolio as our [inaudible] hotel properties and our internal asset management team continue to drive profitability aggressively. We expect to make about $120 million to $130 million of capital investments in our portfolio during the year. Again, with most of the disruptive work taking place in the first half of the year.

On to moving parts. Our guidance is based on our existing portfolio and capital structure and does not reflect the effect of any potential acquisitions, dispositions or refinancings that we may undertake during the course of the year. As it is, there are a number of significant variables affecting this year's outlook you should be aware of.

First, with respect to the renovation program Gary reviewed earlier, it's important note that our full-year guidance contemplates approximately $8 million of revenue displacement resulting from project-specific disruptions. Of this more than half is expected to occur in the first quarter. Also our full year guidance includes $2.8 million of guaranteed payments for the Hyatt Regency Century Plaza which should be realized during first half of the year and $2 million of guaranteed payments for the Fairmont Newport Beach, which will be recognized in the fourth quarter.

Our 2007 EBITDA also includes $2.6 million of interest income for the mezzanine loan we made as part of our structured investment in the Doubletree Guest Suites Time Square. And finally our corporate overhead includes a $2 million add back including both cash and stock amortization for the transition period during which time we will have two CEOs. For full disclosure, we tried to get Steve to work for free this year, but he's a tough negotiator. At any rate, these double costs will not be replicated in 2008.

Finally indicators. Group rooms in our Sunstone managed hotels is up 4.2% over this time last year. This means that we have 4.2% more group rooms on the books for this year at our Sunstone managed hotels than we did last year at the same time. These group rooms are showing up at a 7.5% increase in rate. Our brand managed hotels are also up in booking pace versus last year. Several of our brand managed hotels are still undergoing renovations which has dampened short term bookings in the first half. With that said, pace is still up 2.5% and we've seen solid rate increases over the prior year.

To wrap up, we realize that as we grow this company, the nonrecurring effects of our renovation program, changes in our leadership team and continued execution of our profit improvement initiatives make it a challenge to model a true run rate for Sunstone detail. So I hope the additional detail we've provided today will help you formulate a more accurate picture of the company going forward. I will now turn the call back over to Bob.

Thanks, Ken. Great job on detail. Before we turn the call over to questions, I would like to take a few minutes to reflect on the progress we made at Sunstone over the last few years. I'm pleased with the transformation of this company and I'm very excited about its future. Under Steve Goldman's leadership, it has been -- we are very optimistic about the future. It is my goal to position this company as the best in class lodging REIT in terms of the asset quality growth potential and management team depth.

Our portfolio compares favorably with those of our peers. Since the IPO, we have sold 29 noncore hotels for $226 million. These lower growth primarily limited service and midscale hotels would have required several million of deferred maintenance or no return Capex in '07 and '08. We replaced them with 15 high quality hotels for over $1.6 billion. These assets are large, full service hotels located in high barrier and urban markets with superior long-term growth potential.

Approximately 80% of our EBITDA today comes from the top 15 U.S. markets, primarily located on the coasts. Just as a point of comparison, the 15 hotels we have acquired, including our 38% ownership of Doubletree Times Square, had a 2005 RevPAR of $124, compared to Host Hotels 2005 RevPAR of $123, and LaSalle's RevPAR of $122.

In addition to transforming our portfolio through acquisitions, and dispositions, we have invested heavily in our existing hotels to provide superior long-term growth. We have 11% of revenues into our portfolio since we went public in September of '04. As we've seen in the past, we expect the internal investment to provide above market growth by positioning our hotels to meaningfully increase their penetration in the respective markets.

Lastly, we have assembled a first-class management team to take Sunstone to the next level. I believe our management team has as much depth and strength as any other team in the industry, with the exception of possibly Host, which is some similarly-sized company of about five or six times our size.

We have grown over the past two years and we have recruited talented individuals to help round out our already strong team. The combination of having Steve Goldman lead the team with Jon Kline, Ken Cruse, Gary Stougaard, Marc Hoffman and the rest of the strong team will provide the leadership that this company needs to go forward. We have the top quality portfolio, a disciplined approach to acquisitions, a solid track record for adding value through renovations and say sound balance sheet and outstanding team, and yet our stock trades at an FFO multiple that's nearly two full turns below that of our peers. In short, we are very confident that the work that we are doing now will maximize long-term cash flows and real estate value of our portfolio for our investors. Thank you very much for your time and interest in Sunstone. We will now turn over to questions.

Thank you. [OPERATOR INSTRUCTIONS] One moment, please for the first question. Our first question will come from Celeste Brown with Morgan Stanley. Please go ahead.

Hi, guys. Good morning.

Good morning, Celeste.

Two questions for you this morning. You talked about being patient and waiting for the right deals to come along in terms acquiring hotels.

Are you more weary about buying hotels that would need significant renovations at this point in the cycle or do you think there are opportunities out there like the Fairmont Newport Beach? And secondly with all the money out there chasing hotel assets, does it make sense at some point to take advantage of that and sell the company?

I will answer the first question -- the second question first, we believe the company has strong solid growth and look forward to increased share price appreciation. In terms of acquisitions similar to the Fairmont, which was a very extensive renovation, Gary and the team spent a significant amount of time turning that hotel from basically a three-star $100 average rate hotel to a $250 average rate hotel that's close to a five-star hotel. We are very pleased with what the results are going to be at that hotel.

But if we took that -- if you look at 2006, the company took basically an $8 million hit against earnings for doing that renovation and owning that hotel. We have purposefully not taken on very extensive renovations and passed on some acquisition opportunities that were that deep. We have actually asked Jon Kline and other members of our finance team to figure out ways of doing things like that off balance sheet and we will work on that in 2007.

Great. Thanks.

Go ahead.

Sorry. Thanks.

Next question.

Our next question comes from Jeff Donnelly with Wachovia Securities. Please go ahead.

Good morning, guys. A couple of questions. Ken, how much of the guarantee was remaining on the Century Plaza year end 2006, and what again is your assumption there for '07?

The guarantee remaining on Century Plaza is $2.8 million at the end of '06. We expect that that full $2.8 million will be realized during the first half of 2007.

Okay, and just related to that, can you share with us what EBITDA was for that property in '06 and maybe where you guys think it might be in '07?

Jeff, as consistent with our current policy and our past policy, we don't give specific details on individual hotels.

But the year-over-year growth numbers on the EBITDA there will be very strong. The hotel is back into full swing, as Gary mentioned in the renovation. The month of January was outstanding and we just came from a board meeting up there and the hotel was really performing well and we expect a great 2007.

I guess related to that, for the Fairmont, I think you guys are assuming $2 million of yield support in '07, which I think is lower than your previous assumption or guidance. Is that hotel ramping better than you originally thought, or is it just $2 million is what was remaining -- the remaining portion of the support?

We are very enthusiastic. That is the number that we internally are using. It's slightly higher than the internal Fairmont budget. The January RevPAR number was right on track to their budget, which we are very optimistic about during the week, Tuesday, Wednesday, Thursday, we are seeing many sell out nights. In fact, I think we sold out more nights in January than we did in all of 2006. Okay.

And just one last question, Bob. Considering the Hyatt Regency in Newport Beach, I guess where are you guys at in looking at timeshare at that property? I believe that's coming up in the next 12 to 24 months.

Hey, Jeff. It's Jon. I will say that one. We're looking through the city, and then we get the great pleasure of dealing with The California Coastal Commission, so that project is 18 months from breaking ground.

And you still think it's on track for all intensive purposes?

Oh, yes.

Yes. It's just a long process. We have -- that project includes 84 timeshare units, a ballroom of approximately 10,000 feet and a spa that's approximately 10,000 square feet located on the property. We expect -- upon completion, probably in -- I guess you've got to figure mid '09, that should really enhance the future of that hotel.

Okay. Thanks, guys.

Thanks. Your next question comes from Jeff Randall with A.G. Edwards, please go ahead.

Hey, guys, good morning.

Jeff, good morning.

Hi, Gary, I wonder if you could comment on the six renovation projects. I guess I thought the completion dates were going to be more sort of first quarter '07 and now it looks like I guess five or six are going to be completed in the second quarter. Are those going to be done Midway through the second quarter or how do we think about timing of those wrapping up in the second quarter?

I assume that your one through six are the way I listed them.

Sure.

I think we've had a little bit of slippage, Jeff, but not much. And some of the things that we have moved around, we have moved around to accommodate operations, when we've had big groups in house. And I don't think we're planning on spending any more money on any of those projects than we originally thought we would.

But in terms of disruption, I think kind of mid second quarter, there would probably be no further renovation disruption. I looked through this list.

I will go through each of them quickly, if you like. Century Plaza, like we said will be done in the first quarter. Embassy Suites will be done -- all the guest rooms will be done if the in the first quarter, we're really going to break up the public area work to work around high occupancy periods in this hotel. So, that will be done as it gets done and with the minimum of displacement. At the Orlando Renaissance, we have slowed down some work to accommodate current operations, but I think we're still on track to be done mid April, maybe late April at the latest. Renaissance, I'm sure will be -- it will take through the end of May.

Baltimore.

In Baltimore, I'm sorry, to complete that work. And in Long Beach, I think the bulk of the work will be done by the end of April and then the new ballroom really won't displace anything from the hotel and that will be done in the last part of the second -- of the third quarter, excuse me, probably by the end of September.

Okay. And then a question for Ken. Ken, on the corporate level G&A for '07, can you just give us sort of a run rate or an absolute number that you are expecting for the year? And then you said something about a $2 million add back. If you could clarify how that's being treated in the '07 outlook, that would be great.

Sure. Our corporate overhead run rate, call it $20 million for EBITDA purposes. And then the full before add back number is about $22 million. So, there's $2 million of add back. That will kick in when Steve starts in about a month. So, second quarter, third quarter, and fourth quarter, will all include about a $700,000 add back.

The fourth quarter is only a partial quarter because my full employment goes through October 21st.

That's right. The fourth quarter will only include a partial add back, call it half that.

Okay. And then on the fourth quarter hotel operating profit margins, it looks like you came in at the low end of the outlook. I wonder what was it about the operations in the quarter that sort of pushed you guys down to the lower end of the range you provided?

Fourth quarter we saw property taxes coming a little bit higher on some of the anticipated reassessments of hotels that we bought recently. The fourth quarter we also had some wage increases at minimum wages were increased in several jurisdictions.

And the -- go ahead.

And the last piece I was just going to say was that renovations also had an impact on margins.

Yes. That was my point. Orlando, specifically, had negative NOI, which it took all the margins down as a percentage. If you add that back, you probably would have been mid to high end of the range.

Okay.

And then on the SHP hotels, which represents 33 hotels, they were above the range on margin.

Okay. And then on the '07 margin outlook, Ken, you didn't mention -- I don't think you mentioned energy. What is sort of the outlook for energy for the year?

Energy, we are looking at for about a 6% increase in energy cost this year. It's a tough one to predict. We hedged energy in the areas where we can hedge it, but we are looking at about 6% increase. So not huge relative to prior year increases.

Okay. And then last question, the revenue displacement for the first quarter of '07, from renovations, did you say that was half of the $8 million for the year or was the half of the $8 million directed at the first half of the year?

Yes, no, I -- the $8 million is in the first half of the year, and then I think my comments indicated that more than half of that would occur in the first quarter.

Got it. Thanks.

Thank you, sir. [OPERATOR INSTRUCTIONS]

I should also note that Steve Goldman is on the call, if anybody has any specific questions to ask Steve.

[OPERATOR INSTRUCTIONS] One moment, please for the next questions. Management, at this time, we have no additional questions in the queue will we will turn the conference over to you for any closing remarks.

I just want to, again, thank everyone and look forward to speaking to you on the next call in May. If anyone has any further questions, the team is available to answer them. Again, thanks for your interest in Sunstone.

Thank you, sir. Ladies and gentlemen, at this time, we will conclude today's teleconference. If you would like to listen to a replay, please dial 1-800-405-2236 or 303-590-3000. You will need to enter an access code of 11080012. Once again, if would you like to listen to a replay of today's presentation, please dial 1-800-405-2236 or 303-590-3000. With an access code of 11080012. We thank you for your participation on today's program. At this time, we will conclude and please have a pleasant day.