Sunstone Hotel Investors Inc (SHO) 2007 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to the Sunstone Hotel Investors fourth quarter conference call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the Q&A session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded today, Friday, February 22nd, 2008.

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.

Thank you. Good afternoon, 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 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, 10-Qs, 10-Ks and other filings with the SEC, which could cause actual results to differ materially from those projected. We caution you to consider those 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're providing that information as a supplement to 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 issued yesterday.

With us today are Steve Goldman, President and Chief Executive Officer and Ken Cruse, Chief Financial Officer. Steve will go over the highlights from the quarter and provide his thoughts on current market conditions. Ken will discuss our capital structure and credit ratios, as well as first quarter and full year 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 Steve. Steve, please go ahead.

Thank you Bryan. We're sitting in California today, so I'll say good morning to everybody. Welcome to Sunstone Hotel Investors fourth quarter 2007 earnings conference call. We're pleased to report another strong quarter driven by better than anticipated demand within our hotels and solid profitability throughout our portfolio. Consistent with the last two quarters, our strong performance this quarter is largely influenced by the significant capital that has been invested in our portfolio over the past two years. Our recently renovated hotels continue to post strong year-over-year increases. Adjusted EBITDA during the quarter was up 39% to 86 million and adjusted FFO per share was $0.87, which is a 55% increase over fourth quarter 2006.

Fourth quarter 2007 total Hotel portfolio RevPAR increased 12.6%, driven by a 360 basis point increase in occupancy, and a 7.1% increase in ADR. This result is significantly above our guidance of 10% to 11% and compares favorable to total U.S. upper upscale RevPAR, which increased 5.5% in Q4, according to Smith Travel Research. Comparable portfolio RevPAR, excluding the Hyatt Regency Century Plaza, the Fairmont Newport Beach, the Renaissance Baltimore, and the Renaissance Orlando are four non-comparable hotels that's experienced material and prolonged business interruption during 2006 or 2007, increased 9.1%, also well above the U.S. upper upscale average.

The California Regent experienced an 8.6% growth in comparable RevPAR during the quarter. The Regent posted a 15.3% RevPAR increase, including the Hyatt Regency Century Plaza and Fairmont Newport Beach, both of which achieved significant year-over-year RevPAR increases but are excluded from the comparable calculation. Our Los Angeles and Orange County area hotels experienced a combined 23.4% RevPAR increase over 2006. Excluding the Hyatt Regency and Fairmont, comparable Los Angeles and Orange County RevPAR increased 14.7%. On the other end of the spectrum, RevPAR for our San Diego hotels increased by just 0.4%, primarily due to the impact of new luxury supply on transient business and a weak city-wide calendar.

Our Rochester Minnesota portfolio continued to realize double digit RevPAR growth highlighted by the International Hotel, a luxury hotel located within the Kahler Grand, which is directly connected to the Mayo Clinic. We continue to see robust demand for this high end product and are currently converting an additional floor with 21 new luxury rooms. Going forward we will continue to analyze opportunities to convert additional rooms as well as other highest and best used convergence within the approximately 1 million square feet of building area we have at this property.

The middle Atlantic region continued to perform well in the fourth quarter with an 11% RevPAR increase over 2006. The region was strong across the board including double digit RevPAR growth in New York city and Boston where we saw increases of 12.1% and 13.2% respectively. Comparable operating margins for the quarter increased by 180 basis points, which is above the high end of our guidance range. Management fee expenses, including incentive management fees were 9.1 million in the quarter, approximately 3% of gross revenues which compares favorably to our lodging REIT peers.

The Hyatt Regency Century Plaza continues to perform better than our initial 2007 expectations. 2007 year end EBITDA at the Hotel was more than than 3 times of that of 2006. Operationally, the Hotel made significant margin improvements in 2007 and we feel that there is still potential for further revenue and expense improvement in 2008.

The Fairmont Newport Beach continues to show marked improvements. We're encouraged with the year-over-year top line improvement and are focused on improving margins in 2008. We recently amended the management agreement at this hotel to better clarify certain definitions related to the calculation of property NOI and total investments, both of which impact the guarantee calculation. As part of this amendment, we agreed to suspend the guarantee payment in 2007, leaving the full $6 million of ROI guarantee funds available for future years. Previous 2007 guidance was based on 2.3 million of guarantee payments in the fourth quarter 2007. In 2008, the guarantee will provide a 9% return on our invested capital of approximately $100 million, and that's at the net operating income level.

On the acquisition's front, we continue to analyze potential deals, but at this time, believe the pricing of upper upscale assets continues to remain high and we do not expect to see many transactions that are priced appropriately to our cost of capital, and with a growth rate higher than that of our core portfolio. While we will always be opportunistic and continue to keep our eyes open for new deals, we expect the transaction environment to remain challenging throughout 2008 until the credit market stabilize. Nonetheless, we will continue to look to improve the overall quality of our portfolio through targeted asset dispositions on a case by case basis, and use the available sale proceeds to pay down debt, acquire our stock or simply reinvest in our portfolio.

Yesterday we announced that our Board has authorized $150 million of stock repurchases during 2008. This authorization provides us with the opportunity to repurchase shares with potential asset sale proceeds or free cash flow. With respect to supply trends, we expect that the current state of the credit markets will further delay projects that have not come out of the ground. We have seen new supply in the luxury segment in San Diego which has impacted our W Hotel and we will see new supply increases impact certain of our other markets in 2008, mainly in Baltimore.

In 2008, we will continue to maximize the performance of our portfolio. Marc Hoffman and the Asset Management Team will work closely with both Sunstone Hotel properties and the brand operators to make ensure that they are engaged in agressive cost management and focused sales efforts at the hotels to ensure that our recently invested capital is providing superior returns.

We're cautious about the state of the general economy in 2008, and will continue to closely monitor our portfolio's performance over the coming months. To date, we have seen some softening in transient demand and some isolated cancellations on the group side. That said, 2008 group pace is still up approximately 5% in our brand managed hotels and nearly 10% in our SHP hotels versus this time last year. Over the next few months we'll closely monitor the performance and outlook of the general economy as well as the specific business conditions at our hotels. In the interim, until there is more clarity on where the economy is going, and throughout 2008, we'll continue to focus on cost management at all of our hotels, along with proactive sales efforts, reliable forecasting and operational excellence. Finally, we intend to remain in constant communication with senior management of the brand management companies as well as Sunstone Hotel properties in order to ensure that we can react immediately, should business conditions change.

With that, I'd like to turn the call over to Ken, to take you through additional details on our capital structure and credit ratios as well as the first quarter and full year guidance.

Thanks, Steve, and hi, everyone. With respect to our capital structure and credit ratios, it was the same old story in 4Q. We continued to improve. We ended the quarter with $1.7 billion of debt, 100% of which is fixed at an average rate of just 5.5%. The average term to maturity of our debt is 9 years. In December we continued to pair down our debt balance by repaying an $8.7 million mortgage loan secured by the Sheraton Cerritos. This loan had an interest rate of 8.78% and was scheduled to mature in 2009. From a capital needs perspective, we believe we are more than adequately insulated against the ongoing credit freeze. We have no debt maturities until 2010, and no near-term need for external financing. We estimate the value of our unencumbered hotel portfolio to be approximately $900 million, providing significant access to mortgage capital, should the need arise. Finally, with our $200 million credit facility and 115.9 million of cash and cash equivalents on hand, we have very strong liquidity.

As for our credit ratios, we ended the quarter with pro forma net debt to EBITDA of approximately 5.5 times, which is meaningfully better than our 2007 target of 6.0 times. We also entered the quarter with a pro forma fixed charge cover ratio of approximately 2.0 times, which is right at our 2007 target level. We expect to see additional improvement in our credit ratios as our hotels continue to ramp up and as we continue to amortize and opportunistically repay our outstanding debt balances. We estimate that our common dividend payout ratio in 2008 will be less than 70% of our cash available for distribution, which is well below the average for REITs.

A quick accounting update. The FAS B has delayed it's ruling on certain proposed changes to the accounting for exchangeable notes. If the proposed changes do ultimately become codified we may be required to report slightly higher interest expense, due to the inclusion of an implied non-cash interest component on the notes. At this point it's unclear if or when a definitive ruling will be issued or become effective, but it has, as has been our practice, we will plan to apprise you of any update to this accounting policy during future calls.

Okay, onto guidance. I want to point out that the guidance we're providing at it time is based on expected performance of our existing portfolio, without factoring for and potential acquisitions, dispositions, financings or share repurchases we may ultimately carry out during 2008. As Steve mentioned, our Board has authorized a repurchase of up to 150 million of our common stock. We will continue to evaluate the various alternatives for uses of our excess cash flow from operations and asset sale proceeds. These uses may include repurchasing our common stock, prepaying existing debt, acquiring hotels or simply retaining cash. One of our key goals is to continue to maintain a flexible balance sheet so that we may take advantage of opportunities as they arise.

While our Q1 and full year guidance is based in part on the expectation on slower growth in the U.S. GDP, demand for U.S. lodging tends to be highly correlated to the overall U.S. economy, so we would expect any changes in the U.S. economic trends to have a direct effect on our business.

As full detail on our guidance can be found in our earnings release, I'll just walk through the highlights at this point. For the first quarter, we expect total RevPAR to increase between 2 and 4% over the first quarter in 2007, and we expect comparable RevPAR to be up between 1 and 3% over Q1, 2007. We expect total hotel portfolio operating margins in the first quarter to be down approximately 25 to 75 basis points, and comparable hotel portfolio operating margins are expected to be down approximately 50 to 100 basis points, as compared to the first quarter of 2007.

The first quarter will be somewhat pressured by several isolated factors, specifically a seasonal shift in group business from 1Q to 3Q at our D.C. Renaissance property, and our renovation of the Marriott Boston Long Wharf, which we expect to complete by the end of the quarter. And with respect to the full year, we expect both total and comparable RevPAR to increase between 2 and 5% over full year 2007. We expect both total and comparable hotel portfolio operating margins to range from down 25 basis points to up 50 basis points as compared to 2007. And we expect full year adjusted EBITDA to be approximately 308 to 323.5 million and adjusted FFO per share to come in between $2.88 and $3.12.

To wrap up my comments, I would you like to say, that in spite of our stock price trend we are very proud of our progress and operational performance in 2007. It is a primary importance to us to deliver on our promises, particularly as it relates to our consistent delivery of earnings growth, as outlined in our guidance. While we are guarded in our optimism for 2008 we believe our portfolio of recently renovated, well located, institutional quality hotels is well positioned to out perform.

With that, I thank you all for your continued interest in Sunstone, and I'll now turn the call back over to Steve to wrap up.

Thanks, Ken. Even in these uncertain economic times, we believe the lodging sector is fundamentally sound and we remain focused on execution and improving our effectiveness at maximizing the value of our assets. As Ken said, we own a geographically diverse portfolio of principally institutional quality upper upscale hotels. We've implemented new levels of discipline and accountability throughout the Company, and we share a cohesive vision for creating long term value. We'll continue to focus on our core competencies, as we drive internal growth while evaluating acquisition opportunities that will enhance our earnings, thereby allowing us to build long term shareholder value.

We appreciate your time today as well as your continued support of Sunstone. I am very proud of what this team has accomplished in 2007 and look forward to talking to you again in the coming months. Thank you.

With that, I'd like to open up the call to questions. Operator, please go ahead.

Thank you. We will now begin the question and answer session. (OPERATOR INSTRUCTIONS) Our first question comes from the line of Patrick Scholes from JPMorgan. Please go ahead.

Hi. Good morning. In your commentary you mentioned potential for some asset sales. What sort of pricing multiples are you seeing in the market for assets similar to your noncore portfolio?

It's an interesting question. What we see happening in the market right now, assets of higher quality with higher growth potential and higher [baric] entry markets, it's unclear what the pricing of those assets is. And I believe it will remain unclear throughout the year 2008 until the credit market stabilizes and we see some transactions. You almost have the analogy right now, if you know you live in a nice house and now is not a good time to sell your house, you hold your house. To specifically answer your question, with regard to the noncore assets. I think it varies on a case by case basis. I think it varies as to what the potential buyers' needs are and what their current capital cost situation is.

To be more specific, the way we're looking at potential dispositions is not to do an all-out marketing of any of our hotels. The way we would appreciate dispositions is to target certain assets and then find where those assets match best with a potential buyer. You have several buyers out there, due to a lot of capital in the market, who are holding a bunch of capital that they're still looking to put out and they're looking to put it into opportunities where they feel they can do value at. A lot of the assets that we would sell are assets where's there could be some value add opportunities with some additional renovation. So, I do not want to hedge the question, and not give you a specific cap rate, but I don't think there is a specific cap rate right now. I believe that quality assets, while, in theory, the cap rates should be moving, based on increased cost of capital and less availability of debt, and higher cost of debt, we're not seeing a fundamental shift in asset pricing just because of the lack of transactions. And on some of the smaller assets where you can finance them through life companies or where you have funds that have raised capital and have lines of credit, I think a lot of that will vary on how those buyers view the asset and how they view the upside potential of the assets.

Okay. In follow-up to that. When thinking about your noncore assets versus your core assets, what's are more the characteristics of noncore versus what you want to continue holding in your portfolio?

I think the first way to answer the question is, we have 46 assets and we put our assets each quarter into buckets. We rank them from 1 to 46 in terms of their earnings. We rank them from 1 to 46 in terms of their earnings per room, we rank them in terms of their margins, but I think as a practical matter, the chart that I like best when we have our quarterly board meetings is the one that ranks them into A, B and Cs. The way we rank that 15 As, 16 Bs and 15 Cs. I think, if -- no matter the size of the portfolio, I believe that we'll always mark the portfolio to market, we'll always look at which is our number one hotel and which is our number last hotel and we'll always have A, Bs, and Cs and appropriate percentages like that.

With regard to the characteristics of assets that we would sell, which is probably largely in the C category, because I don't think we have any hotels in the A or B category that we would consider selling under any circumstances right now. The categories are smaller hotels, more turshiary markets and hotels that require some capital We sold the Sheraton Salt Lake City at the end of 2007, and I think that hotel was a perfect example of hotel that we would characterize as a disposition hotel. It was not one of our best hotels, it was not in a great market, it was not in great condition, and it required significant capital to maintain the Sheraton franchise, and significant capital being approximately $15 million. So when we looked at whether or not we wanted to own the hotel, we looked at the hotel in today's value and we sold it at about 8.2, 8.3 -- 8.2, 8.3 times '07. We looked at in today's value at the time, and then we looked at it, would we want to own it with another $15 million of investment in it? And the decision there was a very clear, no. So I think that gives you a little bit of the thinking, how we characterize assets that we would put up for disposition.

Just two more quick questions here. I didn't see your forecast for 2008 CapEx in the press release. That was my first question. And second is, what -- you've historically said 5 times debt to EBITDA ratio as your level, is that still the same?

The last question is yes. The first question, with regard to our CapEx, in 2008, we generally expect to spend somewhere between 80 and $90 million, which includes the Long Wharf renovation. On an ongoing basis, we believe that a true run rate CapEx, for any lodging company, is probably somewhere, realistically, 5 to 7% on an annual basis, plus individual ROI projects on top of that.

Okay. Thank you.

Thank you. Our next question comes from the line of David Loeb from Baird. Please go ahead.

Hi. Good morning. I wanted to just get a little clarity on your buyback interest. I appreciate the comments about how you would fund that, either with assets sales or free cash flow, but can you just give us a little idea of your appetite for that? It sounds like you have no appetite to increase your leverage and decrease your [float].

Yes. David, I think that's a good question. It's very interesting if you listen to various people give their opinions on stock buybacks. There is a very clear sentiment with REITs that stock buybacks limits the future growth of the Company, which I personally agree with, and it's something that we'll always consider. That said, we think it is always a good idea to have an authorization to repurchase common stock. When evaluating uses of our free cash flow and proceeds from potential asset sales, we'll always consider several different uses of the fund that include paying down debt, include acquiring other assets, includes investing in our existing portfolio, includes simply sitting on the cash, and last includes buying back shares.

And the way I look at the share buyback, and why I ask the Board for the authorization to acquire shares, I think, like all of the other alternatives that we have for use of our capital, we should have the opportunity to acquire shares, because there may be a moment in time, and I don't know how to say this, other than using these words, there may be a moment in time where the share price of our stock is just kind of ridiculous. And if at that point in time coincides with a window period where we have the availability of acquiring our shares, I like to have the flexibility. And that was really the thought behind going to the Board and asking them for authorization to acquire shares.

As a follow-up, do you think that we're now in a time where you're share price is ridiculous?

That's a great question. And I think we're in a time right now where there is uncertainty as to the back half of the year with regard to the general economy. We're in a time now where we see that retail growth is slow. And we're in a time now where we see that energy costs are increasing. We're in a time right now where we see the credit market still in turmoil. So we're in a time of somewhat uncertainty. That said, I look at the price of our shares, I look at the price of the other REIT shares. I look at the way these companies have traded historically, and I think the prices that we trade at today are factoring in a lot of the uncertainty. That said, is there a potential for additional movement plus or minus? I don't know. I don't have a crystal ball. I don't think that the prices of the stocks right now are at ridiculous levels but I think we're starting to get a little bit close.

One more, if you don't mind. On your dividend your pay out of taxable income was substantial. You didn't have a lot of margin in what you paid out in 2007. Does that suggest that you might have some upward pressure or need to increase the dividend during 2008?

This is Ken. I'll take that one. As a stabilized portfolio, our taxable income is going to grow at a pretty consistent trend with our FFO per share. We increased our dividend this year by about 10%, so we feel like we have got good coverage there. But, yes, you are correct, that we paid out, essentially, our taxable income, 100% of our taxable income last year in the form of a dividend. Part of that was also a gain on an asset sale, which drove a little bit of additional taxable income last year. So we have some room on the taxable income side. We do expect our taxable income to continue to grow with our portfolio, but at this point we feel like we have got good coverage.

So no particular need to raise the dividend unless you have substantial gains?

Correct.

Okay. Thanks.

Thank you. Our next question comes from the line of Jeff Donnelly from Wachovia. Please go ahead.

Morning, out there, guys. A few questions. I guess, starting with Steve. With the softness that you guys saw in the corporate transient limited to a specific market, or did you see it spread throughout your portfolio? What are you seeing in, I guess, similarly to leisure in that regard?

Hi, Jeff, how are you? I think the softness, we clearly saw it accelerated in San Diego, where we had additional supply. We've seen some general softness towards the end of the fourth quarter and in the beginning of the first quarter. But nothing -- nothing systematic that you could draw a trend from at this point.

And that goes for leisure as well as corporate transient?

Yes. We've seen a little bit of softness in New York on weekend. A little bit in Chicago. A little bit in San Diego. But again, nothing systematic that we're going to push the panic button on yet.

And maybe I just didn't follow you earlier. But, concerning the Fairmont, Newport Beach, are you guys going to receive the fourth quarter 2007 guarantee from them in 2008? I guess I'm trying to just determine whether you get both the payment for 2007 and 2008 or are you foregoing one of them?

Yes. And let me give you some background, because you'll probably ask the follow-up question too. As we began to work on calculating the ROI guarantee payment, for 2007, that would have been paid in 2008. Frankly, we identified some ambiguities in the management agreement related to the deductibility of certain expenses, as well as the amount of credit would would see for certain investments. So we actually had a bit of a dispute as to how to calculate the payment, and more importantly, what the basis would be for our investment going forward.

So we and Fairmont both wanted to tighten up the language in the agreement, prior to determining the total amount of the guarantee payments. We didn't finalize the language until after the books were closed for 2007. So as part of the negotiation, we agreed to waive the guarantee payment due in 2007. So in answer to your question, we will not receive a 2007 payment in 2008, but the waiver will in no way affect the total amount payable under the guarantee, which remains currently at the full $6 million.

It's just a timing issue, effectively?

Yes. Effectively as opposed to the guarantee. If it were to be burned out, which we're hopeful that it doesn't get burned out, effectively if we didn't waive it in 2007, say that that would go through 2007, 2008, 2009, whatever, now it goes from 2008, 2009, 2010, whatever.

I'm curious. Why not have it work the other way, where they effectively pay you under the previous interpretation of the agreement and then sort of credit them next year?

Frankly, it was a give and take. I was not prepared to reduce the guarantee payment to reduce the items of expense that we believed were deductible. I was not prepared to reduce the capital investment. So one of the ways to bridge the gap, and quite frankly, the reason that we didn't book anything for 2007, and why this went into 2008, was because, if this didn't get done, if we didn't make an amendment, we were going to pursue a different path. So, as part of the give and take, we thought, that since we didn't book it, they had asked for relief from the 2007 payment, based on the way they had interpreted calculations. We agreed. Rather than to risk the future of the contract, which remember too, the definition of the invested capital goes not only to the guarantee, but it goes to performance standards, it goes to the ability for them to extend, based on performance standards, and it goes toward the calculation of incentive management fee. I didn't want to make any compromise to the contract -- any contract that impacted that. So the short answer to your question was, it was a give and take, and that was something that we were able to give to them, so they were satisfied with the outcome as well.

If I could switch gears over to the Century City and maybe a different management contract. I'm just closing the loop, I guess, on an old topic, but at one point, maybe about a year ago, it looked like you had an opportunity to effectively cancel that management contract, and I'm not suggesting that you do, but you may have that ability to do it for a little implemental capital, and maybe what you do is use that position to your advantage with the Hyatt. Has there been any movement there?

We never actually had the opportunity to cancel the contract. What we had is, there was a performance standard that kicked in after the fifth complete year of operation of the hotel. And they were so far under water at that point, we had the opportunity to say, guys, we don't think you're going to make it, maybe there is a different path that we want to follow. So, putting aside whether or not they're going to make the performance standard, I guess that's probably like three years from now. I think it kicks in in '12, 2012, it's the first opportunity that we have to terminate them. Putting that aside, the property is just doing so much significantly better, that we just -- we just do not think that that's a path of discussion to entertain right now, particularly since, frankly, one of the reasons we believe it's doing so much better is the relationship between Mark Hoffman and his guys and David Horowitz, the general manager, and Mark Allen the regional manager at the hotel, it's fantastic. And we have a very cooperative relationship where it's -- they're talking to us about how to better invest in the hotel, we're talking to them about cost savings, they're talking to us about their cost savings. It really is a fantastic relationship, and it really did turn the quarter somewhere in the third quarter. So to go down a different avenue at this point, frankly, we do not have any interest.

And how is the hotel looking now? As you look at the 2008, your bookings versus maybe your original underwriting? I know it wasn't necessarily your underwriting, at least from the Sunstone side, how does it stack up?

The hotel is actually getting fairly close to its underwriting. And the CP, the Century Plaza has 88% of its group books -- it's group rooms on the books for the year. And the other thing that has been the very pleasant surprise there, and remember this is also during the writer's strike, which we saw some impact at the Century Plaza, but not significant, the transient demand there has been absolutely phenomenal. And that's really what has driven it. Because with the higher level of transient demand your less reliant on group business for a compression.

And just one last question. I guess, sticking with Hyatt. You guys are exploring a time share project at one of your properties in Orange County. Is there any update there? Is that still on path?

Yes. The time on that project is associated with environmental regulatory approval, and we're now at the point where we're very close to going to coastal commission which, frankly, is the longest and most difficult approval, and it's very hard to handicap exactly how long that will take.

Thanks, guys.

Okay, thanks, Jeff.

Thank you. Our next question comes from the line of Michelle Ko with UBS. Please go ahead.

Hi, guys. Good quarter. I was just wondering if you could clarify, can you give us a sense for how much you expect to receive in the guarantee payment for the fourth quarter of '08? And then also, how -- if you could also give us a sense of how many noncore assets you think you might plan to sell in '08? And then, finally, what your net interest [asset] is for '08?

Okay. I'll take those in the order that you asked them. With regard to the Fairmont, we probably think its somewhere between 2.5 to $3 million for 2008. And again, remember, that's at the NOI level, so the guarantee is not based on EBITDA, the guarantee is based on NOI. It's a return to NOI, which is 9%, I believe I stated in the prepared remarks. 9% on 100 million, plus whatever we spend above the FF any reserve going forward. With regard to [sell], I think we're fairly close with regard to a potential asset sale announcement this quarter. Going forward, I think a lot of that will be, as an answer to one of the earlier questions that was asked, I think a lot of is going to be just based on what the profile of buyers out there are and how they match up with potential assets that we'd look to sell. With regard to the interest question, Ken, I see you banging around on your calculator. Do you want to answer that?

Well I was working on something else. [Interest to sell], good morning, if you look at our debt balance, we have got $1.7 billion of debt. Weighted average interest rate is 5.5%. We look for a run rate of about $93.5 million, plus you have also got to take our share of the JV interest for the Doubletree times grow, which is another, call it, 7 to 7.5 million depending on what LIBOR does. So, I would use a straight 100 million for this year as a run rate.

Okay. Great. Thank you.

Our next question comes from the lines of Smedes Rose from KBW. Please, go ahead.

Hi guys. I have two questions here. Your RevPAR guidance relative to your margin guidance seems to imply some significant cost cutting or maybe less growth in some of the noncore cost areas. I was wondering if you could talk about that a little bit, I guess, property insurance, workers' comp, other things? Have you actually begun to cut costs at the property level or are you just sort of beginning to?

Hi, Smedes, thanks, that's a great question. Given the inflation trend, the inflation trend hotel expenses, conventional wisdom, and I think I heard on La Salle call, somebody quote that it's somewhere around -- that margins will begin to erode when RevPAR growth drops to approximately 3, 3.5%. The low end of our guidance range indicates margins will be down 25 basis points with a 2% RevPAR growth. We believe this is aggressive, but achievable. First, we've been working closely with the brands to identify additional cost cutting initiatives such as headcount reductions, many of which have been already put into place. Second, through our working relationship with Sunstone Properties, which accounted for approximately 40% of our pro forma 2007 EBITDA, we were able to mandate cost containment issues faster than other owners who must work through the brands systems and channels in order to implement the deficiencies. I've said, the wonderful thing about our SHP advantage is, that if we see any trends changing, which they give to us realtime, we see a trend change on a Monday, I call to Evan Studers, who runs those operations on a Tuesday, he goes to his operating people on a Wednesday, and by Thursday, everything is in place. So this, combined with our ability to see realtime data from these guys, allows us to adjust properties without first going through any brand filters.

Next, there is a lot of large expenses that we've got that that don't necessarily grow at an inflationary rate. Two of these expenses, workers' comp and property insurance are expected to be relatively flat year-over-year. We already know this. Our workers' comp policy for our 26 SHP managed hotels and three Hyatt managed hotels, that I believe we reviewed in November of 2007, was a 30% savings to the prior year's program. This policy will run through October of this year, so, we already have those savings in place. Also, 2007 looks to be a light year for property insurance claims, which, with no catastrophic events, so we believe that would result in further favorable cost impacts when we go to our renewal in June.

And when you, looking at workers' comp and property insurance, what sort of percent is that of your total overall expenses? Like under 10%, or?

Yes, it's under 10%. But it's a meaningful chunk and it is something that we have some control over.

And a higher level of certainty than some other expenses right now.

And then I wanted to ask one more. You mentioned the group revenue pacing up for brand managed and then for your Sunstone managed. On a blended basis across your portfolio, what does that equate to?

It's about 8%.

8%. All right. Thank you.

Thank you. Our next question comes from the line of Chris Barranca from Deutsche Bank. Please go ahead.

Good morning, guys. Nice quarter. Just wanted to drill down a little bit on the outlook. I think we've all kind of seen fourth quarter pick up. For you guys maybe it was better. But for the industry it didn't really get any pick up on the short-term business. How do you look at that for, kind of, '08? I mean, the one Q, I think you mentioned you have a weak group calendar. But, what are the odds, I mean, how much visibility do you think you have? And is there any disconnect between, kind of, what you see on a realtime base from your Sunstone managed properties and maybe what the brand managers are telling you? Is there any disconnect there? And how do you describe your visibility? Thanks.

Hi Chris. First off, I don't think there is any real disconnect from what we here from the SHP guys. We actually had the managers conference this week, and so we got a chance to chat with all of these guys individually on an informal basis. I don't think that we've seen a whole lot of disconnect yet. I don't think we've really seen a whole lot of disconnect yet in the brand managed hotels either. I think the key question that you raise is the visibility. And I think, that's where our management team and the management teams of the other lodging companies, that's just the uncertainty that's associated with the general economy right now. And in terms of looking forward, the guidance that we've given for the first quarter is consistent with what we've achieved thus far, and what we can see through the end of the quarter. We have visibility starting through the second quarter, but obviously, as you get later into the year, the visibility is less due to the uncertainty associated with the economy. Hello?

Thank you. Our next question comes from the line of Amanda Bryant from Merrill Lynch. Please go ahead.

Great. Thanks, guys, good morning. Just wanted to ask if you would not mind please reminding us what are the big projects driving your 80 to 90 million CapEx budget for this year?

Okay, hi, Linda. If you say take 1 billion, 1.1 billion of revenue and you assume ongoing capital of 5 to 7%, that's 50, 60, $70 million right off the bat just for ongoing maintenance.

Okay. And then you have the Long Wharf?

And then you have the Long Wharf Marriott, which was about a 15, 14, $15 million project. I think about 2/3 of it is going to be in 2008. We have got a renovation going on, which we started last year in Houston, which is beyond that 5%. Those are really the big ones. That's about 7, $8 million of that. Oh, and I mentioned also the international hotel. That's about a 4 or $5 million renovation associated with the conversion of one of the floors to luxury rooms.

Now should we be able to -- should we expect the maintenance portion of your CapEx to decelerate as you go forward into '09?

That's a great question. Because, as a practical matter, because you want it to decelerate, it doesn't. And I'm not trying to be facetious. It's just, the fact of the matter is, it's a capital intensive business. And we've spent hours, I've actually got, the guys that I spend the hours with sitting in the room here, talking about how we spread our capital, where we should invest our capital in the properties, over what period of time, when do we do required room renovations, how much can we delay, when do we start the design process. And I think the fact of the matter is, as business activity goes down, the capital needs of the hotel will probably still be fairly consistent, the trick is, looking at spending every dollar and making sure that the dollars we're spending are high impact dollars, and at the same time we're not avoiding the necessary repairs, so our hotels do not fall into ongoing or long-term disrepair. So to answer your question, we are just like hawks in terms of where we spend every single dollar. And what the outlook for spending is. Not just in the current year, but over a three-year plan for every hotel in our portfolio. And we match that up against business conditions, we match that up with potential needs to conserve our cash, we match that up with potential other uses of our cash and try to find the best piece of the puzzle fitting to maximize the value of the Company.

Okay. Thank you.

Thank you. Our next question comes from the line of Michael Salinsky from RBC Capital Markets. Please go ahead.

Good morning, guys, and congratulations in the good quarter. I apologize if you addressed any of these questions in your opening remarks. But, in terms of your outlook for fiscal year '08, there's not -- you're not assuming a recession, just to be clear?

We're assuming a slowdown in the economy. We're assuming overall GDP increase somewhere around 1.5%.

Okay. In terms of your outlook for food and beverage for the year?

The question of food and beverage growth?

Yes.

We expect that the growth in food and beverage revenue will slow down from 2007 increases but still be above 2007.

Okay. Just a quick bookkeeping question. The bioefficient L.L.C. sale that you had during the quarter, was that gain included in other income? And if so, what was that amount?

Yes, the gain was included in other income, it was about $6 million.

Okay. And then, finally, in terms of new supply for fiscal year '08, is there any particular market you're -- you're specifically concerned about? Or, how is the supply picture shaping up for '08 right now?

In the near term, there is some big convention hotel projects coming on line in by the end of 2008, San Diego, Baltimore and D.C. These are markets that are all adding large convention hotels and we anticipate that there could be some impact. We stated in the prepared remarks that new luxury supply has already hit us in San Diego and impacted our W there. My personal view, of all of the markets where we have got supply coming in, the one that concerns me the most is Baltimore. Because we have got supply coming into the particular market, and we've also got supply coming into the DC corridor which may pull out of that market.

Great. Thanks guys.

Thank you. Our next question comes from the line of Dennis Forst from Keybanc. Please go ahead.

Good morning. I had a couple of questions on, actually, just trying to get my model right for room nights. I know that your room nights are based on both the Marriott and then the other nights, I kind of ask this regularly, maybe Bryan knows the answer. But, what were the number of room nights in the fourth quarter? And what do you expect them to be in the first quarter?

Let me start out with that one, and I think we can work with you probably offline on this one. We've got just over 16,000 rooms in our portfolio. So on annual basis you've got about 5.8, 5.9 million of total available room nights.

That includes the Doubletree in New York?

That does not include the Doubletree in New York, that does not. So, on a straight line basis every quarter you're going to be about 1.5 million room nights per quarter. Are you asking about availability of room nights?

Yes. Total available room nights.

So for the fourth you'll actually have slightly more because the Marriott portfolio has an extra period in the fourth quarter. We can get you the specific numbers. But you're essentially 1.4 for quarter for one, two and three. And about 1.6 for Q4.

Okay. Great. Thanks. I'll talk offline about some other things.

Thanks, Dennis.

Thank you. At this time, I show there are no further questions in the queue. Please continue with any closing statements.

Once again, we're very proud of our accomplishments for the year. We're looking forward to exceeding the targets that we've set for 2008. And again, we appreciate everybody's continued support of Sunstone. Thank you very much.

Thank you. Ladies and gentlemen, this concludes the Sunstone Hotel Investors fourth quarter conference call. If you'd like to listen to a replay of today's conference please dial 800-405-2236 with a pass code of 11107467. ACT would like to thank you for your participation. You may now disconnect.