Sunstone Hotel Investors Inc (SHO) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Sunstone Hotel Investors second quarter 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, August 9th, 2007. I would now like to turn the conference over to Mr. Bryan Giglia, Vice President of Corporate Finance of Sunstone Hotel Investors. Please go ahead, sir.

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 do not yet have a copy, you can access it on 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 contained in our prospectuses, 10-Qs, 10-K and other filings with the SEC which 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 that information as a supplement to information prepared in accordance with generally accepted accounting principles. Explanations of such non-GAAP items and reconciliations to net income are contained in the earnings release that we filed yesterday. With us today are Steve Goldman, Chief Executive Officer; and Ken Cruse, Chief Financial Officer. Steve will go over the highlights from the quarter and provide an update on our portfolio as well as his thoughts on current market conditions and its impact on our acquisition and disposition strategy. Ken will provide an overview of our second quarter results as well as third quarter and full year guidance. Following the remarks, the team will be available for questions. To begin management's discussion, I would like to turn the call over to Steve. Steve, please go ahead.

Thank you, Bryan. Good morning, everyone. Welcome to Sunstone Hotel Investors' second quarter 2007 earnings call. This was my first full quarter as Sunstone's CEO and I'm very pleased to highlight a very productive quarter for the company. On our first quarter call, I discussed my immediate goals to meet or exceed financial performance expectations to get to know and evaluate Sunstone's hotels and management team and to complete the company's ambitious renovation program on time and on budget. I am happy to report that we did everything we said we were going to do and have accomplished a number of significant tasks towards building a stronger company.

The highlights from the second quarter are as follows. We finished the quarter at or above the top end of our guidance and exceeded analyst consensus estimates with strong performance on each of the key metrics: RevPAR, EBITDA, FFO per share, and hotel operating margins. We executed on our renovation program and have substantially completed the six major renovation projects outlined on prior quarterly calls. We continued to upgrade the overall quality of our portfolio by selling six non core hotel assets. We completed the senior management transition and clarified the lines of responsibility and accountability within our organizational structure. We continued to enhance our balance sheet through several transactions, including a modification of our credit line and the issuance of $250 million of 4.6% exchangeable notes.

Key performance metrics. The 2007 second quarter was another strong quarter for Sunstone and our hotels continued to perform well, posting strong RevPAR and margin increases. Comparable RevPAR increased 9.2% in the quarter over the prior year. Total revenue was up 23% over the prior year to $271 million, and adjusted corporate EBITDA was up 20% to $86 million.

Upgrades to our portfolio through completion of major renovations. When I joined Sunstone, I knew the number one item on my to do list was to get my arms around the renovation program and make sure it was completed on time and within budget. I am very pleased to report that we have substantially completed all major phases of the renovations on schedule and within budget at the six hotels I spoke of last quarter. These hotels include the Hyatt Regency Century Plaza which as previously noted was completed in the first quarter, Renaissance Orlando, Renaissance Baltimore, Renaissance Long Beach, Embassy Suites La Jolla and Hilton Times Square in New York. As we discussed during the first quarter call, certain minor nondisruptive secondary projects are scheduled to be completed later in the year at some of these hotels, including new furniture in the Century Plaza lobby and backyard, atrium enhancements at the Embassy Suites La Jolla, meeting space renovations and a new gym at the Times Square Hilton, the addition of a new junior ballroom at the Renaissance Long Beach and the addition of a new spa at the Renaissance Orlando. Each of these projects is proceeding on schedule for completion by the end of this year.

We are now through the major phase of renovation at these properties and have returned freshly renovated product to the market at a point in the lodging cycle when we believe we have several years of strong demand ahead of us. We expect these assets will outperform in their respective markets and drive meaningful returns on our investments. While several of our competitors are either just planning or in the early stages of their renovation programs, the bulk of our renovation program is complete and the risk of renovation related displacement is largely behind us. Across the board, the end products of these renovations are truly impressive. Please click on the Sunstone Hotel Investors website, where you will find a presentation including additional detail and pictures of the completed projects.

Upgrades to our portfolio through asset sales. In the second quarter, we completed the sale of six non core select service hotels located in secondary and tertiary markets. We were able to take advantage of strong market conditions and sold the hotels at favorable cap rates. The cap rates are even more impressive after taking into consideration the approximately $8 million to $10 million of deferred CapEx we would have had to invest into these properties over the next 12 to 18 months. Moreover, we employed a like kind exchange structure with this transaction, effectively shifting significant gains into other long-term assets. Going forward, we will look to sell additional hotels that do not fit the company's profile and redeploy proceeds into higher growth opportunities that add long-term value to our company.

Senior management transition. During the quarter, we completed a reorganization and transition of senior management. The goal of the reorganization was to eliminate redundancies and establish a clear organizational structure, delegating responsibility and accountability to four key areas reporting directly to the CEO. These areas are finance, operations, capital investment and legal. I am very pleased with the team and structure we now have in place and believe this group will be effective in executing on our plan. This is also the right team to take Sunstone to the next level.

Recent market conditions and impact on Sunstone. I would like to address the recent volatility in the credit and equity markets. Although equity multiples have contracted and credit spreads have widened, increasing the cost of debt, we have not yet seen this increase translate into an increase in cap rates for high quality hotels. Moreover, single asset pricing remains relatively strong, as there continues to be an abundance of capital chasing deals and sellers have not yet lowered their price expectations for good and high quality assets. We will continue to take advantage of current pricing to sell additional hotels that do not meet our long-term growth objectives. We will also constantly monitor market conditions, and continue to keep our balance sheet strong while we search for growth assets. However, considering current pricing levels, capital costs and anticipated growth rates, we do not expect to find opportunities in the near term to acquire single assets on terms that make economic sense for us. We have a high quality portfolio that is in good physical condition with no significant future capital requirements and seek only to add properties that will increase the overall quality of our portfolio and are accretive to long-term shareholder value. As a portfolio manager, we will run our company in a disciplined, patient and cycle dependent way, which means there will invariably be periods when acquiring hotels makes sense and others when it makes sense to curtail our acquisitions activity. Under any scenario, we will continue to invest in our core hotels that are located in higher growth markets with barriers to entry and focus on aggressive asset management to maximize cash flow at all of our properties. Our balance sheet is in great shape and we don't need to access the capital markets to execute on this plan. With that, let me turn things over to Ken to take you through additional details on the quarter as well as third quarter and full year guidance.

Thanks, Steve and good morning everyone. I'd like to spend just a few minutes reviewing our operations for the quarter and discussing recent transactions before going over our outlook for the third quarter and the full year 2007. As Steve mentioned, for the second quarter of 2007 our comparable hotel RevPAR increased to $125.77, an improvement of 9.2% over the second quarter of 2006, which was at the high end of our guidance of 8 to 9.5%. This change in RevPAR was driven by a 4.3% increase in average daily room rate, which was up to $157.61, and a 360 basis point increase in occupancy which ended at nearly 80%. In other words, approximately 46% of our increase in comparable RevPAR was attributable to increases in rate and 54% was attributable to increases in occupancy. RevPAR for our full portfolio of 46 hotels increased 7.5% to $126.73. This growth rate compares favorably to the total U.S. RevPAR trend, which increased 5.7% in Q2 according to Smith Travel Research, 5.4% improvement in rate and a 0.4% improvement in occupancy. Our full portfolio RevPAR was comprised of an average daily rate of $160.01 and occupancy of 79.2%.

Drilling down into the regions, our top performing region for the quarter was once again California, which saw a 13.3% growth in RevPAR, in addition to the Hyatt Regency Century Plaza and the Newport Beach Fairmont, both of which posted significant RevPAR increases. The Century Plaza was up over 25% and the Fairmont was up over 100% over the prior year. We also saw double-digit gains at the Del Mar Hilton, up 10.1%; the Manhattan Beach Residence Inn, up 10.3%; the Hyatt Regency Newport Beach, up 18.9%; and the Long Beach Renaissance, which was undergoing a renovation during the quarter, posted an impressive RevPAR increase of 14.5% versus the second quarter of 2006. Our other west region also posted strong RevPAR growth for the quarter as a result of double-digit RevPAR increases in the Portland Marriott, up 11.1%; the Park City Marriott, up 14.5%; the Provo Marriott, up 11.3%; and the Salt Lake City Marriott, up 20.9%. Our Midwest region continues its strong year-to-date performance led by our Rochester portfolio, which collectively turned in a RevPAR increase of 11.9% over the same quarter the prior year.

Our middle Atlantic region faced some challenges during the second quarter. Several of the groups that booked business in our D.C. Renaissance ended up with lower than expected pickup. And as a result, that property turned in RevPAR growth of just 5% for the quarter. Boston also underperformed during the quarter, with our Marriotts in Long Wharf and Quincy turning in RevPAR growth of 0.3 and 2.4% respectively. This is primarily attributable to weak citywide group bookings and reduced transient rate compression in that market. We expect roughly the same trends in Q3 with demand turning appreciably stronger in the fourth quarter, as indicated by our pace at those hotels. The Hilton Times Square, which had approximately 2,000 room nights out of service due to the suite conversion project during the quarter, still managed to post a stout 8.8% RevPAR increase. As we stated earlier, the suite conversion is now complete at that hotel and we have an additional 16 rooms to sell. We expect to see meaningful RevPAR gains at this hotel for the remainder of the year.

Comparable hotel operating margins increased by 80 basis points during the quarter. This is 30 basis points above the high end of our prior guidance. Margins were slightly pressured by higher healthcare costs, higher year-over-year property insurance costs, but with our new property insurance program in place going forward our premiums will be down 13% on a year-over-year basis. So this trend will reverse in the third quarter. Also, on the expense side, management fee expense including incentive management fees was $8.7 million for the quarter or approximately just 3% of gross revenues, which compares very favorably to our lodging [RevPARs]. Total management fees included $2.2 million paid to Sunstone Hotel Properties, $4.7 million paid to Marriott, $1.3 million to Hyatt and $200,000 each to Starwood and Fairmont and $80,000 to Hilton. The Fairmont Newport Beach continues to show marked improvements. 2007 booking base has been robust. The property's pace is up 119% from last year and the rooms on the books are up 19% in rate. The Hyatt Regency Century Plaza has also performed well post renovation and has plenty of room for additional improvement. In addition to a 25% improvement in RevPAR, the hotel continues to increase its operational efficiency as our asset management team actively works with Hyatt to drive profitability. You should note that while we expect to fully utilize the -- while we expected, excuse me, to fully utilize the $1.8 million remaining guaranty for the Hyatt Century Plaza during the second quarter, as a result of strong operational performance, we were able to retain approximately $750,000 of that guaranty and roll that into the third quarter. We do expect to fully utilize that amount in the third quarter. Also during the quarter we estimate that our hotels experienced approximately $3 million of renovation related displacement, principally experienced at the Renaissance Orlando and Renaissance Baltimore hotels as the renovation programs in those properties were completed.

On the transactional front, during the quarter we took advantage of favorable market conditions and recalibrated our balance sheet through a series of financing transactions involving nearly $1 billion of various tranches of our capital structure. These transactions included the following. On May 23rd, we amended our unsecured revolving credit facility, resulting in a lower cost of borrowing and (inaudible) maturity. On June 18th and subsequently on June 27th, through our operating partnership we completed a combined sale of $250 million of 4.6% exchangeable senior notes due 2027. Concurrently with the notes offering, we repaid the $175 million loan on the Hyatt Regency Century Plaza. This hotel is now unencumbered of debt, providing us with flexibility to pursue various opportunities with respect to this hotel in the future.

Also concurrently with the notes offerings, we repurchased approximately $2.6 million of our shares. Going forward, as adjusted for the repurchase, our fully diluted weighted average share count for Qs 3 and 4 will be approximately 63.9 million shares. For the full year 2007, our weighted average share counts will be approximately 63.8 million shares, assuming we do not repurchase any additional shares between now and the end of the year. These share counts include the Series C convertible preferred on an as converted basis. I'd like to point out that we believe we may be required to change the way we account for the newly issued exchangeable senior notes beginning as early as Q1 of 2008. The proposed accounting changes would result in slightly higher non cash interest expense related to these exchangeable notes. We anticipated this proposed change at the time of the offering, and it's important to note that the proposed change will have no significant effect on the economics of this transaction. The final ruling has not yet been made by the FASME, and we expect to have more information on this proposed accounting change during our third quarter call.

We respect to balance sheet and credit ratios, our balance sheet is sound. We ended the quarter with $1.7 billion of debt, 100% of which bears fixed rate interest at an average rate of 5.6% -- an average maturity of eight years, assuming the exchangeable notes are only remain outstanding through their first put date. We have no significant maturities until the end of 2010. We ended the quarter with approximately $110 million in cash on hand including restricted cash. As for our credit ratios, currently our total debt to [TEV] is approximately 50%. We ended the quarter with net debt to EBITDA of approximately 6.2 times, which is slightly higher than our target level for 2007 of 6 times, and a fixed charge coverage ratio of approximately 1.8 times, below our target level for 2007 of 2.0 times. We project that we will end the year with net debt to EBITDA below 6.0 times and a fixed charge coverage ratio slightly in excess of the 2.0 times target. With the expected rampup of our newly renovated hotels, we expect to see additional improvement in these ratios in 2008.

With our relatively low cash available for distribution payout ratio, currently approximately 70% on trailing 2007 numbers, the substantial completion of our CapEx program and relatively limited demands on our capital, the question we now face is what to do with our excess cash flow. First, we intend to repay certain indebtedness when it becomes prepayable. For example, just last week we prepaid a $13 million, 8.5% mortgage encumbering our Crowne Plaza in Grand Rapids. Second, we may look to also return capital to our shareholders to potential increase in our dividend levels or possibly additional share repurchases. As I mentioned in June -- as I mentioned, in June the board authorized the company to repurchase up to $100 million of our common stock in 2007. To date we've repurchased $73 million of stock, leaving us with the authority to purchase another $27 million during the remainder of 2007. Our board generally evaluates our dividend policy on an annual basis at its November meeting.

Before we dive into guidance I want to explain a change that we'll be making to our definition of comparable hotel portfolio beginning in the third quarter. In an effort to increase transparency and improve the relevance of our comparable statistics, we will be modifying our definition of comparable hotel portfolio to reflect what we believe will more accurately show our stabilized same store performance of our portfolio. The new definition will exclude those hotels that have experienced prolonged and material business interruption during the current year or the prior year. For example, if a hotel were to experience prolonged and material disruption from March through August of 2007, the hotel would be excluded from our comparable hotel portfolio for all of 2007 -- the renovation year -- and all of 2008, a year which we would expect to see the hotel's RevPAR ramp up. I want to make it clear that in order to qualify as a noncomparable hotel, a hotel must experience business interruption that's prolonged, generally occurring over more than one quarter and material -- defined as generally resulting in greater than a 10% decline in RevPAR index. Under the new definition, the only hotels that would be removed from our comparable hotel portfolio would be the Fairmont Newport Beach, which is in its post renovation ramp up phase; the Hyatt Regency Century Plaza, which is also in its post renovation ramp up phase; the Renaissance Orlando, which was under renovation during the fall of 2006 and through the second quarter of 2007 and is now ramping up; the Renaissance Baltimore, which was also under renovation during the greater part of the first two quarters of 2007 and is now expected be in a ramp up phase. Because we expect to see above market growth in both rate and occupancy of the four hotels which will be removed from our comparable portfolio, we expect the RevPAR growth of our total hotel portfolio will exceed that of our comparable hotel portfolio for the remainder of 2007.

On to guidance. Before taking you through our third quarter and full year 2007 guidance, I want to point out that the guidance we're providing at this time is based on the expected performance of our existing portfolio, including all completed acquisitions, dispositions, debt repayments and share repurchases. Our guidance does not assume any additional share repurchases for the balance of 2007. Our third quarter and full year guidance also includes an addback to adjusted EBITDA and adjusted FFO of $400,000 and $4.7 million respectively for costs associated with our senior management transition. Full year adjusted EBITDA and adjusted FFO include an addback of $800,000 for costs associated with a write off of the deferred financing fees and prepayments penalties associated with repayment of the Hyatt Regency Century Plaza mortgage debt.

For the third quarter, we expect to see total RevPAR to increase between 8.5 and 10% over the third quarter of 2006. We expect to see comparable RevPAR excluding the Fairmont Newport Beach, Hyatt Regency Century Plaza, and the Orlando Renaissance and the Baltimore Renaissance to be up 6 to 7.5% over Q3 2006. We expect adjusted EBITDA to be approximately $72 million to $75 million. We expect adjusted FFO available to common shareholders to be approximately $39.5 million to $42.5 million. And we expect adjusted FFO available to common shareholders per diluted share to be approximately $0.62 to $0.67. We expect total hotel portfolio operating margins for the third quarter to improve by approximately 200 to 300 basis points, significantly enhanced by operational efficiencies and improvements at some of our repositioning hotels, chiefly the Hyatt Regency Century Plaza and the Renaissance Orlando, [which had] negative margins during the third quarter of 2006. Also during the third quarter we expect to invest between $35 million and $42 million in capital improvements of our existing portfolio. This represents cash out of the door. So a significant percentage of the expected cash capital outlay will be for the payment of invoices related to work completed during the second quarter.

For the full year, we expect total RevPAR to increase between 7.5 and 9.5% over the full year 2006. We expect comparable RevPAR, excluding the four previously mentioned hotels, to be up between 6 and 7% over 2006. I want to make it clear that this does not represent a reduction in our full year comparable RevPAR guidance. At this point, as a point of reference, our RevPAR expectation for the group of hotels comprising the old comparable portfolio remains at 7.5 and 9.5% for the year, which is consistent with our prior guidance. We expect adjusted EBITDA for our full portfolio to be approximately $307 million to $312 million. We expect adjusted FFO available to common shareholders to be approximately $176.1 million to $181.1 million, and we expect adjusted FFO available to common shareholders per diluted share to be approximately $2.76 to $2.84 as compared to our earlier guidance of approximately $2.69 to $2.80. And we expect for the full year, total hotel operating margins to improve by approximately 175 to 225 basis points over 2006. And for the year, we expect to make between $130 million and $140 million in capital investments in our existing portfolio. This includes the recently scoped and budgeted Marriott Boston Long Wharf guest room renovation project, which we expect to begin in the fourth quarter and expect to complete in the fourth quarter -- in the first quarter of 2008, excuse me.

I'd like to take just a moment to provide perspective on the transition our company has gone through over the past 2.5 years since the IPO. At the end of 2004, the year Sunstone became public, our portfolio generated RevPAR of $69.81. For the second quarter of 2005, our RevPAR was $80.10, comprised of 74.8% occupancy and $107.08 in rate. For the second quarter of 2006, our RevPAR was $105, and as I mentioned for the second quarter of 2007, our RevPAR was $126.73 -- meaning Sunstone's portfolio RevPAR has grown at a compounded annual rate in excess of 25% since 2004. This is the product of strong internal growth as well as selective dispositions and high quality acquisitions. Before turning the call back over to Steve, I would like to say that we are all extremely enthusiastic about the future of Sunstone. Our balance sheet is strong. Our renovations are complete. And Steve has done a great job of assembling the right team, making certain we are focused on only those matters that are critical to our success in instilling a collective drive to transform Sunstone into the best economic engine we are capable of creating. Our success will be confirmed through sustained above market shareholder returns. With that, I'll turn the call back over to Steve.

Thanks, Ken. Now that I'm comfortably transitioned into the CEO position at Sunstone, I am even more excited about the company's future. We are entering the next phase of the lodging cycle with a solid balance sheet and hotels that are in good physical condition and well located in strong markets that we believe to be positioned for above average industry growth. Our major renovations and repositionings are now substantially complete with no potential displacement risk, and the demand trends and individual values for our portfolio of upper upscale properties are strong. We have a solid team of experienced executives who understand their responsibilities and know they're accountable for executing on our plan and our company's success. These attributes will allow us to take advantage of opportunities as they arise. Our resources are geared toward capturing market share and driving increased cash flow from all of our assets. We will keep our balance sheet strong and remain focused on solid asset management and execution with accountability throughout the entire organization as we aim for growth in cash flow and increased shareholder value. I truly believe the company is well positioned for the future. With that, I'd like to open the call to take any questions. Operator, please go ahead.

Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. (OPERATOR INSTRUCTIONS) Our first question comes from the line of Michelle Ko with UBS. Please go ahead.

Hi, just a few questions. I know that the majority of the renovations on the six hotels have been done. But how much in EBITDA disruption is left for the remainder of the year? And also, do you have a sense of the EBITDA impact in 4Q in 2008 for the renovation of the Marriott Long Wharf in Boston? Lastly, do you plan to sell more of your non core assets?

Hi, Michelle, how are you? Answer to your first question, zero disruption for the remainder of the year. Your second question I think was provide a little bit of detail on Marriott Long Wharf and potential displacement there? We've got our rooms program in place. We've got the rooms program in place, the plan for renovation of the ballroom. We anticipate starting in November of this year and doing the project through November, December, January and February. There may be potentially $1 million of disruption in Long Wharf, but we hope that by doing the renovation during the slowest quarter, the slowest four months of the year will minimize that. And these numbers are baked into our guidance for the end of this year.

Okay. Great. And then lastly, do you plan to sell more non core assets?

We're constantly evaluating our portfolio. My personal belief is at any point in the cycle and at any time in the ownership of your portfolio, you always have a bottom 10 or 15% of your assets and you should always be looking to recycle them. I think in particular, we have some assets that have a slower growth profile than other assets our port folio combined with that they require some CapEx to maintain their brand standards and to maintain their competitiveness in the markets. We'll look and continue evaluating the sale of those assets.

Okay. Great. Thank you.

Our next question is from the line of Jeff Donnelly with Wachovia Securities. Please go ahead.

Good morning, guys. Steve, if I could ask that last question in a different way. In your prepared remarks, it sounded like you were maybe now more of a seller than perhaps you might have been as of even last quarter. Am I reading that correctly?

If the current pricing holds on, I think you've got some displacement right now because it is significantly more difficult to get debt on property acquisitions for individual private owners and public companies than it was a month or two ago. But I still see pricing holding on -- and if pricing holds on, yes, I am more interested in selling some assets now than we were previously.

Could you expand upon that? What sort of pricing change have people seen in the typical levels of leverage that they would be going out getting maybe a month ago versus today?

I think the biggest difference, Jeff, is terms. I think what you saw earlier this year was very aggressive terms. You saw terms where portfolios could be acquired, assets could be sold off and equity could be returned. I think that's really what's changed. And I think what's changed, the fundamental of acquiring, there is not the mentality of acquiring for the quick flip anymore. Buyers who are acquiring assets today are probably more geared towards putting some more money into their properties and holding them on for a longer period of time. I think the target buyers right now particularly for assets we would consider selling are probably the private owner operators that are making money through operations, they're making money through renovating the properties and they're making money with a business plan of holding those assets for a longer period of time. I think that's consistent with the way I answered the question for Michelle. We'll look at assets that we don't think have as high a growth profile as other assets in our portfolio, particularly compared against those that we've recently renovated, as well as looking at assets with the lower growth profile on top of that need additional CapEx to maintain their growth.

Specifically on Century Plaza, have you firmed up your thinking there, either I guess call it on hold sale, or just given your status of Hyatt given the relatively low cost of termination of the margin?

Well, the property's performing very well right now. I was talking about this with Ken the other day. The anticipated NOI for that property is nearly three times this year what it was last year. And we think the prospects for the property are good. With regard to Hyatt, we have ongoing conversations with them. I have a prior business relationship with them. They realize that we've got a lot of capital tied up into this asset and they realize that we're very focused on the asset. So we're going to continue -- as Ken said in his prepared remarks, we're going to continue to push the asset, and we're very optimistic about continued rate increases in the asset as our renovations are taking hold there. And we have a very positive outlook for next year at the hotel.

Just two last questions for Ken. Ken, how many room nights do you expect will be out of service in Q3 and 4?

Q3 and Q4 we expect very limited room nights if any. We've have a few nights in the Long Wharf property, but it's isolated and it's under 500 room nights at this point. And Q3 is zero for nights out of service.

And when you say total RevPAR growth of I think 7.5 to 9.5 for 2007, can you tell us what that number would be for full year 2006 that you're growing it off of and could you give us that number for both Q3 and Q4?

You're asking what the total RevPAR was in 2006?

Yeah, I guess on a pro forma basis. So if we look at your revised guidance, we can understand what figure you're going off of.

Okay. One second.

Or you can give it later in the call.

We've got it right here. We're going off of a full year '06 of $110 for our base portfolio. That would include the prior ownership of the hotels we've acquired during the course of the year.

Do you have it for each quarter or --

Do I have it for each quarter?

For Q3 and Q4.

We don't have it right now for Q3 and Q4, but I can get that out to you. Thank you.

Our next question comes from the line of Jeff Randall with A.G. Edwards. Please go ahead.

Good morning. Ken, if you could also just in terms of the total RevPAR including the hotels under renovation, what was that during the second quarter this year?

So you want total RevPAR during the second quarter for the hotels -- for the full portfolio? You want total RevPAR during the second quarter for the hotels -- basically for the full portfolio?

RevPAR growth for the second quarter.

That was 7.5% for the full portfolio.

Okay. And just on the Marriott Long Wharf, you guys mentioned Boston has underperformed. I'm wondering what -- if you went back to the margin announcement when you acquired the asset, what the forward multiple would look like today based on '07 EBITDA estimates. Would that be higher? I would assume it would be. But maybe just comment on that.

I'll jump in and then I'll turn it back over to Steve. The underwriting -- the performance in the second quarter and the expected performance in the third quarter is consistent with our underwriting. I should have probably been more clear about that in my comments. The softness in that market was fully anticipated.

Okay.

And actually I'll add to that. I believe we had a great experience with Marriott with regard to planning the rooms renovation and the addition of the nine rooms and corridors and the meeting space. And I think -- as I answered in Michelle's question -- that we're moving along in November, December. I think probably the only real difference between our underwriting -- and this is that we're getting the renovation going earlier than we thought we would. Part of that is due to the confidence because we completed the bulk of our other renovations at our other major properties.

Okay. And maybe Steve, if you could answer this. On the non compete payments made to the departing executives, I just want to understand -- these are being accrued today and then payment will be made in October '08 if they've not competed with the company in the interim?

Yes.

And I guess, what exactly constitutes competing with Sunstone and how enforceable are these non competes?

I think what I need to do -- the agreements are filed and you probably need to just take a close look at the agreement.

Okay.

I think it's fairly self-explanatory.

Thank you.

Thanks, Jeff.

Our next question comes from the line of Dennis Forst with KeyBanc Securities. Please go ahead.

Good morning. I had a couple of questions just to understand corporate overhead. First of all, the stock comp expense that is broken out in the cash flow statement -- is that included in corporate overhead? There's an amortization of deferred stock comp that shows up on the cash flow statement.

Yes. Ken can elaborate. Yes, that's included.

That's included there. Wouldn't you say that's a non cash item?

The non cash item is -- there's amortization of deferred stock comp which is called out as non cash.

I was just wondering why that's not added back for FFO purposes.

You'll see that there is an addback for the non cash portion, if you go to our net income reconciliation down to FFO.

Right.

There's a $437,000 addback for the non recurring, non cash component for deferred stock.

Stock comp. Oh, I see, yes. It was at the very top of the next page and I missed that. Secondly, the non recurring charge for the CEO succession, $3.8 million, that's also all in corporate overhead?

Yes.

Okay. So if I back out the stock comp and the nonrecurring severance, et cetera, what would be a normal going forward quarterly corporate overhead charge?

If you look at the -- I think the best place to start would be the income statement. If you look on a year-over-year basis for the second quarter, we turned in about a $9.5 million corporate overhead, which was $4.5 million last year. As you correctly pointed out, $3.8 million of that is nonrecurring CEO transition and senior executive severance cost. $400,000 of the difference is also the non cash portion of that. Then we've also got some build in on a year-over-year basis. That actually brings the difference down to a fairly minimal difference. We've got some build in on a year over year basis of a few additional heads that we've got on the team. But as a percentage of gross revenues, you'll see that the year-over-year comparison is fairly consistent.

Going forward it's probably more like $5 million a quarter?

Going forward, you can take out of the second quarter number the base compensation for the two executives that departed at the end of the second quarter. So there's another $0.25 million that will come out of the quarterly numbers.

Okay. And then lastly, I wanted to understand the undistributed income allocated to the C preferreds. $3.1 million.

Sure. I'll try to take a very brief explanation for that. Because for FFO per share purposes, that is -- it's a change to our net income and then it's an addback for FFO per share so there's zero impact on FFO per share. I should also point out there is zero cash impact. It's simply a dual class accounting instance where because our net income was significantly higher this quarter as a result of a gain on the assets that we sold. We needed to invoke the dual class accounting for the Series C and allocate a portion of our income to those instruments. But there's zero cash effect and there's zero FFO per share effect, because those Series C are dilutive for FFO purposes already.

For the first quarter it was --

It was lower.

It was the opposite direction, wasn't it? It added back $1.4 million.

If you look at the six month trend, you'll see an actual -- a lower adjustment for the Series C. That's just because on an average basis, the net income that allocable to those instruments was lower on an average basis for the six months than it was for the three months that ended in the second quarter.

Maybe offline or sometime, you can explain it in a little more detail for me.

I would happy to. Again, I don't want to belittle the GAAP requirements because they are important but for FFO purposes --

It's irrelevant. Okay. Thanks.

Our next question is from the line of [Charles Hsu] with KeyBanc. Please go ahead.

Morning, guys. I just had a couple questions about the asset pricing environment, if you could help me understand that a little bit better. We have been hearing from a lot of REITs that they're net sellers right now, just seems like -- are you seeing a lot of inventory out there, a lot of hotels for sale, above what you've been seeing in the past?

Yes, it's interesting. Actually, the inventory of quality assets is actually -- I think is declining. And I think that's one of the things that's keeping pricing up. It's almost like a home sale. When you're on the bubble of whether or not you want to sell your house and there's a concern that you might not get your price, you decide that you won't sell. On the acquisition side in many cases, I have often considered my major competitor to be a no sale. So I actually think inventory of product is slowing down a bit, particularly on the high quality side.

And what's the best way to classify what you would consider a quality asset, like urban, upper up scale?

Urban, upper upscale, generally assets you would put into the category of high barriers to entry.

I don't know if you can do this for us, but can you walk me through an example of -- just to help me understand the current CMBS borrowing environment of what a [sale] hotel that is doing $10 million in NOI -- what kind of terms you would have been able to get six months ago versus what can you get today and some of the different covenants that have changed over that time?

Ken, you want to take that? Question being, what is the difference in [sale] hotels making $10 million NOI today in the CMBS market what you could borrow today versus what you could have borrowed.

The terms, rates, covenants.

Sure. I think my answer will be in two parts, because you've got a situation right now where there's some backlog in the CMBS markets ,as I'm sure many of you are aware. This is partly a product of the rating agencies themselves notching debt and driving tougher underwriting standards. It's also partly a product of some of the volatility we've seen in the world markets. We think the drivers of liquidity are in still in place. Within the next three months, you'll probably see a reversion back to somewhat normal lending trends, although underwriting standards may be a little bit tougher. Right now, I would say we wouldn't even make a foray into the lending market and thankfully we don't need to. The terms are just tough to come by on financing. Within the next three months, I would expect that that will moderate itself out and you're probably going to see underwriting standards that are based on cap rates that are 100 basis points higher than what they had been previously. And still dealing with LTVs of 65% for our portfolio on new debt. So I think it's more of an underwriting standard that will become more stringent. Spreads themselves will probably come back into line. On AAA debt and the investment grade tranches, we haven't seen that meaningful increase of a spread even now. But I would expect spreads will come back within -- to within 20 basis points of where they had been prior to the recent turbulence.

And the LTV that you were able to get six months ago, what was that in the range of? You said right now you're getting 65% -- or you're expecting to be able to get 65%.

Our most recent comparable transaction would be the loan we put in place on the Boston Long Wharf hotel. That was a 76% loan to purchase and that was done at swaps plus 54. The all-in rate was at 5.58% and that an IO loan -- interest only for ten years. You're not going to see those kinds of terms. I should make it clear from my prior comment that spreads may remain within 20 basis points of where they were, probably 20 basis points higher, but because of underwriting standards your proceeds levels will be significantly lower. So that 76% loan to purchase is probably below 65% loan to purchase and you're not going to get an IO term.

Okay. It's going to be normal 30, 30 year ramp?

Yes.

Okay, great. Thanks a lot.

You're welcome.

Can I jump back in? Jeff Randall had a question earlier. I wanted to check a couple numbers. He was asking about the base portfolio RevPAR on a quarterly basis. I can give some ranges on that, just so people can help -- to help with people's modeling. For the second quarter, the base portfolio RevPAR for comparison was $117.90. For the third quarter for the prior year was approximately $115, and then for the fourth quarter for the prior year was approximately $107.

Our next question is from the line of Joe Greff with Bear Stearns. Please go ahead.

Most of my questions have been asked and answered. Just one quick question. I know you referenced it in the press release, about 2008 capital investment. What do you see as your minimum 2008 capital investment as it stands right now?

I think we're back to normalized levels on our capital investment for 2008. Normalized would be around 4 to 5% of total revenue and on top of that, whatever major projects we add to it.

Got you. And has there been any spillover into the first quarter of next year from stuff that you did this year?

Yes, we will see some spillover. And the spillover, Joe, is generally -- the work gets completed at the end of the year and then the bills and the payments follow up in the first quarter.

What would that amount be, roughly?

Are we providing? I don't think we provided any '08 guidance on that yet. We're going to wait for future calls.

Thank you.

Management, there are no further questions at this time. Please continue.

Okay. We appreciate all of your participation in the call, and we look forward to continuing to execute on our plan and future correspondence and meetings with you guys in the future. Thank you very much.

Ladies and gentlemen, this concludes today's conference. You may now disconnect. Thank you for using AT&T conferencing.