Sunstone Hotel Investors Inc (SHO) 2008 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Sunstone Hotel Investors third quarter conference call. At this time, all participants are in a listen-only mode. (Operator Instructions).

As a reminder, this conference is being recorded today, Wednesday, November 5, 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.

Good afternoon everyone, and thank you for joining us today. By now, you should have all received a copy of our earnings release. If you do not yet have a copy, you can access it on the Investor Relations tab of 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 described in our prospectus, 10-Qs, 10-Ks and other filings with the SEC which could cause results to differ materially from those projected. We caution you to consider those factors in evaluating our forward-looking statements.

We also note that this call 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 issued earlier today.

With us today are Bob Alter, Executive Chairman and Chief Executive Officer; Art Buser, President, and Ken Cruse, Chief Financial Officer. Bob will begin our call today an overview of the operating environment. Art will then review the highlights from the quarter, and finally, Ken will discuss our liquidity, capital structure, and guidance. Following the remarks, the team will be available to answer questions.

To begin management's discussion, I'd like to turn the call over to Bob. Bob, please go ahead.

Good afternoon, everyone, and thank you for joining us today.

During today's call, we will cover five topics. First, I will discuss the current economic environment and its implications for Sunstone's long-term value. Next, Art Buser, our new President, will review our third quarter operations and near-term cash maximization tactics. And finally, Ken Cruse will discuss our liquidity position and our guidance for the remainder of the year.

Number one; current operating environment and implications on Sunstone's value. For the past year, the US and the world have been struggling with a growing financial crisis and declining consumer sentiment, which have led to the global economic downturn we are currently experiencing. The lodging industry is highly correlated to the overall economy, so you might expect we are seeing softening in our business.

During the third quarter, our comparable RevPAR was down 1.3% as compared to last year's extraordinary level, not a trivial decline, but certainly not catastrophic. In fact, I would characterize our 78.5% occupancy and our $158 average rate as healthy. Our portfolio continues to perform at a very high level. The third quarter same-store RevPAR down just slightly to 2007 peak levels, and year-to-date, we are still up more than 9% as compared to our 2006 levels, which was a very strong year for our industry and our portfolio.

Meanwhile, our stock, which traded above $15 a little over a month ago, and over $30 a little over a year ago, has recently traded below $4, which puts our total equity market cap below the value of our cash on hand, and implies a portfolio valuation of less than $120,000 per key. For perspective, we estimate the replacement value per key of our properties ranges from $300,000 to $500,000. Now, I cannot tell you exactly how deep or how long the current recession will be. This downturn is the product of a complicated series of largely unpredicted and seemingly unrelated events, nor can I tell you exactly how far our RevPAR may decline over the next year. We have instructed everyone in our organization to spend less time forecasting and more time focused on filling our hotels at the maximum rate every day.

What I can tell you is this; first, this recession, like all recessions leading up to it, will end, probably within the next 12 to 18 months. In October, we saw a 7% decline in RevPAR as compared to last year. This approximates the worst monthly decline we saw during the 1991 downturn, which lasted approximately 13 months, and was followed by a period of unprecedented growth in our industry.

Sunstone is a real estate owner, not an operating company, and recessionary declines in our operations have less effect on the long-term value of our assets, as ultimately, asset values tend to rise to replacement cost. One factor that does have an effect on the value of our assets is new supply. As compared to the 1991 downturn, we are seeing meaningful lower new additions, supply additions, and given the high cost of capital, I would expect supply trends to remain muted for the foreseeable future. This balance will improve the value of our assets in the long term.

Second, we are well positioned to weather these challenging times. Earlier this year, we sold the Hyatt Regency Century Plaza at a valuation we expect will exceed 20 times the 2009 EBITDA. As we continue to hold a significant portion of the cash proceeds from this sale, our liquidity position is very strong with over $232 million of cash and cash equivalents, including restricted cash in the bank. Our balance sheet is in very good shape with no near-term debt maturities, and our portfolio is largely free from the need of major capital renovations.

Finally, lodging stocks are leading indicators. They tend to peak well in advance of the peak in operations, and they tend to recover very rapidly upon measurable signs of a recovery in operations. Investors today are not making buy or sell decisions based on fundamentals. They are trading on fear. Historically, times such as these have represented exceptional stock-buying opportunities. Sunstone has a high quality portfolio, strong liquidity, a solid balance sheet, and an exceptional management team. By preparing for the current downturn and continuing to focus on maintaining liquidity and conservative balance sheet, we expect not only to comfortably ride out the current recession, but also to be in a position to capitalize on future opportunities.

Now, let me turn over the call to Art Buser to discuss the third quarter, and our cash preservation tactics.

Thank you Bob, and thanks everybody for joining us on the call today. As you all know, I joined the team back in July, and from day one, I truly hit the ground running. Having done a full lap around our properties, and about ten deep into the second lap, I can say with confidence that by and large, our assets are in great shape, they're in the markets you want to be in long term.

Bob mentioned our balance sheet is strong, with meaningful liquidity, and we have the makings of a Super Bowl team. As the leader of this team, it's my responsibility to maximize the performance of our hotels and our people for our shareholders.

Let me first speak to the third quarter results. Even in this challenging environment, our third quarter FFO per share came in just slightly below last year's level. Year-to-date, our portfolio has generated over $2 in FFO per share, 2.5% increase over last year. Adjusted EBITDA for the third quarter was $68.5 million, down 10% from last year, and adjusted FFO per share was only down slightly to last year, $0.69.

Third quarter 2008, total hotel portfolio RevPAR decreased by 2.1%. The 1.1% increase in ADR was partially offset by a 260 basis point decline in occupancy. I am disappointed to say that this result was slightly below the low end of our previously-stated range, primarily due to a greater-than-expected softening in travel across the board, specifically weakness in Baltimore and San Diego markets, and the impact of Hurricane Ike on our two Houston properties. Year-to-date, our total RevPAR increased 1.3% over 2007, outperforming the US upper upscale trend, which is up 0.5% year-to-date.

Comparable portfolio RevPAR, excluding the Renaissance Baltimore and Orlando, our two non-comparable hotels that experienced material and prolonged business interruption during 2007, decreased 1.3%, in line with the US upper upscale performance. Q3 represented the first quarter where our two non-comparable hotels began to comp against renovated product in 2007. In addition, to a more normalized year-over-year comparison, Baltimore was also impacted by the August opening of a new convention-focused Hilton Hotel.

Comparing our year-over-year third quarter RevPAR performance by region, our California properties were down 6.3% in comparable RevPAR. Total LA/Orange County area hotels were down 3.6%, while our San Diego hotels were down 10.7%. San Diego continues to be a challenging market. With the new convention hotel opening in January, we expect this to continue.

In the Midwest region, our Mayo Clinic portfolio in Rochester continues its impressive track record of outperforming the market. Q3 RevPAR for this portfolio was up approximately 8%, driven in part by increased demand for our high-end hotel within a hotel, known as the International at the Kahler Grand. The additional 19 International guest suites are now open, bringing the total number of keys to 44 luxury suites. For the month of October, the International ran 83% at over double the average daily rate of the next-highest rated competitor in our market, in the market, which happens to be our Marriott.

Going forward, we may consider the conversion of additional regular rooms to International rooms, as well as other highest and best-use conversions within the approximately one million square feet of building area comprising Kahler Grand property. The Midwest region itself was down 1.5% to last year, impacted by weakness in Chicago.

The Mid-Atlantic region was up 2.9% for the quarter, primarily the results and the relative strength of Times Square, Boston, and Washington DC. The Southern region's RevPAR decline of 7.6% reflects weakness in Atlanta and the surrounding sub-markets.

Total hotel operating margins for the quarter decreased by 120 basis points, slightly more than we had anticipated. Q3 operating margins were negatively impacted by approximately 50 basis points by the impact of Hurricane Ike in the Houston market. Excluding the Houston hotels, our asset management team and managers were able to cut expenses, resulting in slight margin deterioration of approximately 70 basis points on a RevPAR decline of 2%.

We continue to benefit from the lowest management fee structure among our public lodging REIT peers. Our management fee expenses, including incentive management, fees were $7.3 million in the quarter, or approximately 3% of gross revenues, which compares very favorably to our lodging REIT peers.

Let me shift gears. Bob had mentioned our focus on cash maximization tactics. Further to that, as he said, we expect the next 12 to 18 months to be challenging operationally. Accordingly, our focus is on maximizing our retained cash through the following; first, our biggest expense is operating expenses, $500 million annually, and thus, a major focal point for our organization. We will continue to look for ways to drive operational efficiencies.

Second, in light of less acquisition opportunities, we have redeployed our acquisitions team into asset management. Third, we've minimized our 2009 CapEx programs. Fourth, we're exploring the liquidation of one or more non-core hotels, recognizing it will be a challenge to sell assets in the current market.

Finally, we plan to right size our cash distributions to equate to our taxable income, which we expect to discuss with you during a subsequent call.

With respect to operational efficiencies, our asset management team, working with our operating partners, did an excellent job of streamlining the operations by removing fixed costs from the system. This year, our operators have eliminated 30 management positions from our hotels after successfully redefining each hotel's staffing levels and expense structure. Although it's been a long-term focus to identify and eliminate unneeded reoccurring costs, the current environment has also prompted us to work with our operators to develop plans designed to cut additional costs from each of our hotels during this phase of the cycle. These plans are generally short term and tactical in nature, but can be effective in a assuaging margin deterioration during the downward phase of the cycle.

In addition to right sizing costs in the hotels, we have also carefully scrutinized our corporate expenditures, and have reduced corporate overhead by 8% as compared to budget.

With respect to minimizing capital expenditures, we're already reviewing 2009 CapEx budgets and have already made a number of significant adjustments. As we recently completed major portfolio-wide renovations, approximately $135 million over the past two years, our assets are generally not in need of major work. At this point, we have not cancelled or delayed projects we believe will generate significant returns. Our filter for determining this is mostly based on a hotel's customer, its competition, and the economy. For example, a hotel in a transient market with no rate integrity has a different capital plan that one in a group market where customers are making purchase decisions, mostly based on product quality, for bookings over the next two years.

We believe we are well-positioned to weather this unprecedented and uncertain economic environment. In tough times like this, companies that have a deep operating acumen outperform those who do not, and I am happy we are on the right side of that comparison. Every day in every market, our job is to make sure our teams on the ground have the right resources to effectively sell our hotels, and to take more than their fair share of available business. We cannot change the world, but we can do better than the hotel next door. That is what we have done, and that is what we intend to do. Our year-to-date STR trend is up 2.2%, indicating that we are outperforming our comp set.

We have a recently renovated high-quality portfolio located in many of the top gateway US markets, markets we expect will continue to outperform the US upper upscale markets. And as I mentioned, we believe we have significant liquidity to weather the current economic turmoil.

Our overall strategy, and to use a sports metaphor, we are playing defense by focusing our efforts to maximize our portfolio cash flow. At the same time, we are preparing ourselves to be best positioned to play offense when that time comes.

With that, I'd like to turn the call over the Ken to take you through our capital structure and liquidity, as well as our updated full-year guidance. Ken?

Thanks Art. Good afternoon, everyone, and thank you for joining us today.

First, with respect to our capital structure and liquidity, as Bob said, we finished the quarter with approximately $232 million of cash on hand, including restricted cash. This equates to nearly $4.80 of cash per share. Said another way, our cash on hand equates to better than 85% of the closing price of our stock today. As Art outlined, we are focused on a variety of measures aimed at maximizing our retained cash during these uncertain economic times.

As of the end of the quarter, our ratio of net debt to total assets as defined in our unsecured credit facility was approximately 44%, and the end of the quarter was a fixed charge coverage ratio of 1.93 times. One hundred percent of our $1.7 billion of debt is fixed at an average rate of just 5.5%. This average rate is approximately 200 to 300 basis points below current market rates. The average term to maturity of our debt is more than seven years, assuming that our 4.6% exchangeable senior notes will be put back to us on the first permitted date in January of 2013.

Our closest debt maturity is in December of 2010, which is the $81 million mortgage on our Hilton Times Square, a hotel we believe to be worth well in excess of $300 million. Even in today's market, we do not believe refinancing this hotel at or above its current debt level would be an issue. We believe that especially in these challenging times, the liquidity provided by our excess cash and our absence of near-term debt maturities are critical advantages.

I'll spend a minute now on a topic that's on the minds of many investors, corporate financial covenants. First off, none of our existing debt contains corporate financial covenants. Our $200 million corporate credit facility, which is undrawn, is subject to certain financial covenants, including a minimum corporate fixed-charge ratio of 1.5 times. As I mentioned, we finished the third quarter well above this threshold with a fixed charge coverage ratio of better than 1.9 times.

If we were to see a material decline of more than 20% in our corporate EBITDA from the current levels, we believe we may not continue to achieve this covenant threshold, which would mean our access to the credit facility may be constrained or eliminated. If that should happen, we do not believe our business plan would be meaningfully impacted. We have no debt outstanding on the facility, as I mentioned, and given our strong cash position and lack of near-term debt maturities, we have no plans to borrow on the facility for the foreseeable future.

Moreover, we own 11 unencumbered hotels that we believe could be borrowed against should the need for additional cash arise at a time that a credit facility may be unavailable.

Moving on to our common equity, during the quarter, we continued to return capital to our stockholders through share repurchases. In August, we repurchased three million shares of our common stock for a total investment of $42.1 million, reducing our common shares outstanding by an additional 6% to 48.5 million. We currently have authorization to repurchase an additional 67.1 million of common stock under the 2008 repurchase program. Any future share repurchases will be dependent on our long-term liquidity forecast, as well as market and economic conditions.

Moving on to guidance, first, in the interest of increasing information flow during these uncertain times, we intend to begin providing intra-quarter updates on the operational performance of our portfolio, beginning in mid-December. These updates will be made available to you on our website, and will be submitted to the SEC on Form 8K.

With respect to guidance, as Bob and I both noted, we are seeing a continued reduction in business trends in our hotels. Accordingly, we have reduced our full-year guidance. I also want to point out that the guidance we are providing at this time is based on expected performance of our existing portfolio, and does not account for any dispositions, acquisitions, debt repayments, or stock repurchases between now and the end of the year. As full detail of our guidance can be found on our earnings release, I will just walk you through the highlights at this point.

For the full year 2008, we now expect total portfolio RevPAR to be down between 1% and 4% as compared to the full year 2007. Additionally, for the full year 2008, we expect adjusted EBITDA to be approximately $275 million to $285 million, and we expect adjusted FFO per share to be approximately $2.58 to $2.75.

I'd also like to give you a quick dividend update at this point. As previously noted, Sunstone will recognize a tax gain in 2008 on the sale of the Hyatt Regency Century Plaza. Internal Revenue Service rules generally require that a REIT, at its election, may either pay tax on capital gains or distribute such capital gains to its stockholders within 30 days of the end of the calendar year in which the gains occurred. The combination of our regular and common capital gains is expected to result in a required distribution higher than our prior quarterly dividend of $0.35 per share. In the interest of maximizing our cash position and flexibility in this uncertain environment, it is the current intention to structure the fourth quarter dividend as a special partial cash and partial stock distribution.

Given the current level of volatility in our operations and the potential that we may yet realize certain offsetting capital losses in 2008, we have elected to delay the announcement of the structure, amount, and timing of the fourth quarter dividend until December, when we believe we will be able to more accurately estimate our distributable income for 2008.

I'd also like to point out that the level of future quarterly dividends will be determined by our Board of Directors after considering long-term operating projections, expected capital requirements, and risks affecting our business. Consistent with past practice, we currently intend to maintain our dividend level at approximately 100% of our taxable income, which may result in a reduction in our dividends going forward.

With that, I'd like to wrap up by saying that considering today's uncertain operating environment, we're pleased with our performance year to date. We believe we are well-positioned to weather the challenging operating environment we now face, and finally, we believe our focus on improving our already strong liquidity position will help to facilitate our creation of value for our shareholders going forward.

Thank you very much for your time today, and for your continued interest in Sunstone. I will now turn the call back over to Art to wrap up.

Ken, thank you. We appreciate your time today, as well as your continued support of Sunstone. I am very proud of what this team has accomplished to date, 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, sir. (Operator Instructions).

Jeff Donnelly, Wachovia Securities.

Good evening guys. You mentioned, obviously, in your press release that you continue to pay at 100% of your taxable net income. Are you willing to give us -- I'm not sure if you have this handy -- what your taxable net income was in full year '07, and I'm sorry if I missed it in your remarks, maybe an estimate for 2008?

In 2007, our dividend was just about right on our taxable income for the year, so if you look [back towards] last year, that was pretty close to our taxable income. As I mentioned in my remarks, we are not prepared to give an estimate for 2008 at this time. We're delaying the announcement of the dividend until December when we'll have a bit more clarity on that.

Are you able to maybe express it in a different light as you look forward to 2009, like maybe as a percentage of an FAD payout?

When we make our calculations for taxable income, we look at it as paying 90% to 100% of FAD or cash available for distribution.

That's helpful; and just one last question. I'm not sure if this is for Art of Bob or both. I don't expect either of you to give guidance, specific guidance on 2009 or really play stock picker, but you did mention, Bob, I mean hotel stocks tend to move on RevPAR deceleration or declines, begin to abate. When in your opinion do you believe we hit that period? Is it late in 2009 when you begin to see RevPAR declines begin to slow down?

Jeff, if I knew that, or if any of us knew that, we would not be working for a living. We'd be very wealthy. Obviously, there's a lot of info floating around there that it could be the end of the third or fourth quarter of '09, it could be in '10. Generally, when the bottom is hit on RevPAR and it starts to show year-over-year growth, that's when generally investors get excited and come into the market, and they tend to come into the market kind of at the beginning of that. It's all part of the increase.

Based on what I think will happen in '08, I think our comparisons for '09 should be pretty favorable just because of how bad '08 fourth quarter is going to look. But who knows where the economy goes from here?

And actually, one last question. I guess for you, Bob, probably close to I guess it would be eight years ago, I forget what it was that we found ourselves in a similar circumstance with Sunstone, and you were able to take Sunstone private. You definitely have access into that private equity world. What are you hearing from --?

It was nine years exactly last month, in October.

Not that you're counting. What do you hear from that world today around how they look at, I guess either public company valuations or real estate hotel asset valuation, and when do you think that group gets interested in maybe becoming more active in hotels and real estate?

Did you read page C-14 of the Wall Street Journal today about Blackstone's timing?

Yes.

I would suggest that most of the private equity is sitting on the sidelines for at least a little bit.

Okay, well thanks.

David Loeb, Robert W. Baird & Company.

Hi Bob, I don't know what to say about your level of wealth, but I imagine you really working too. So that's kind of a funny thought. On the dividend level, I clearly think that nobody is going to mind you resetting the dividend in this environment, but I am curious about what your thinking was about a stock dividend, given that clearly your shareholders can't use a stock dividend to pay their taxes. What's the thought here about the potential pollution from that and why you would, why you would use stock dividend and how much you might use.

Hi David, it's Ken Cruse. With respect to the stock dividend, as Art, Bob, and I all emphasized on the call today, our focus is on maximizing our retained cash in this uncertain environment. Certainly, over the long term, our goal is to distribute out to our shareholders a meaningful cash percentage of our income. But in the near term because we have a non-recurring capital gain this year, we are looking into doing a stock dividend, or partial stock dividend, similar to what other REITs have done, including AIMCO, and this would not result in dilution to the existing shareholders as it would be a split, an optional split, for the existing shareholder group only. It's as if, David, if you handed me one share and I handed you 1.1 shares back, that's simply what happens. It's not additional shares being issued to the public. It's just splitting the shares that are held by the existing shareholder group.

So I think it's a great way for us to retain cash in an environment like this, and as you mentioned very appropriately, most of our shareholders are expecting to see dividends reduced by most of the REITs.

Right. The reduction part, I think really applies to next year, and people are going to have tax bills related to the capital gain. But I definitely hear your point about the stock split. It just seems like then it's a phantom dividend. It's really more changing the number of shares that everybody has rather than providing some return.

Back to your earlier comment about the tax portion of it -- a significant number of our shareholders are pension funds that are tax-exempt, so in that case, they can choose the shares. Those that are tax paying have-- will have an option to choose some portion of their dividend in cash. And so therefore, the tax payers will likely pick the cash and the non-tax payers will likely pick the shares.

In terms of it's a phantom dividend, it's not a phantom dividend, but in fact, as Ken explained, the 1.1 or the split aspect of it does solve our taxable distribution requirement without necessarily utilizing what we consider a precious commodity, which is cash.

The option part is something that was not explicit in the release. It sounded like Ken was sort of leaning that way. Thank you for making that explicit because then suddenly, it makes a lot more sense where not everybody is getting more shares, so you're getting a value if you take more shares versus what you're giving up in cash. Would you set some parameters around that? Is that where you're going to decide and announce in December, that you decide that a certain portion is, you can choose a certain portion or within certain guidelines?

David hi, this is Ken again. I apologize for not explaining it more clearly up front. Yes, in December, we will announce the parameters, but essentially what we expect to do is make up to 20% of the total value of the dividend available to shareholders who wish to receive up to all cash in the distribution. We will make that amount available in cash. Now again, we will limit the amount of available, of cash available in the total distribution to 20%, so there is a variety of scenarios where you can see that shareholders who elect to receive all cash may not receive all cash, but I think Bob said it pretty well. Generally, there are a number of shareholders who would prefer to receive the shares, they'll elect to receive all the shares. There's a sub-set of shareholders who would prefer to receive all cash, and they'll elect to receive all cash.

Okay, and then back to the dividend level, is there a portion of your first three quarters' dividends and what would have been the ordinary $0.35 in the fourth quarter that is in excess of where your taxable income has been? I guess what I'm trying to get at is we've made a calculation of what we think that special dividend requirement, or the capital gain distribution requirement could be, but might it be less than that, given that you've paid in excess of your taxable income to date?

David, at this point, we're not prepared to talk about our regular taxable income for the year. But I think you're on a good track there in terms of trying to estimate what we've paid out relative to our taxable income, and certainly, that will factor into the total amount of the dividend that we pay out in January. As you know, it's going to change dollar for dollar with the changes in our operations, and in this volatile environment, we are not prepared today to tell you what our regular taxable income will likely come out at this year.

I see, okay. One more, and then I'll click back in for additional ones. You have $43 million of restricted cash. That seems like kind of a lot. I know you've had that for a while, but what does that relate to, given that you've put a lot of capital into your hotels over the last several years?

We have a number of different reserves, David. As you know, most of our debt is secured debt by the hotels, so we have a lot, at any given point in time, we will have property tax reserves, for example, on our hotels. That's a big number for our portfolio. We pay over $20 million in property taxes, and most of that gets impounded. And there are a variety of other reserve accounts.

All of our brand name hotels and our franchised hotels have an FF&E reserve requirement, which that money goes into funds that's restricted, and then when we go spend capital, we use it out of that fund, but there's always an amount of money in what we call CapEx jail, and that's in the restricted numbers.

Right, it's just for an FF&E reserve, it's a very big number, particularly when, presumably, you got the get out of jail card when you spent in 2007.

We have almost $1 billion worth of revenues, our CapEx reserves are in the $45 million to $50 million a year.

At 4%.

At 4% and 5%, depending on the --.

So it's about $1 million per property.

Right.

Okay, that's great, thank you.

Dennis Forst, KeyBanc

Good afternoon. Ken, I missed one of the points you were talking about with the $81 million mortgage due at the end of 2010. What is the security on that?

That's the Hilton in Times Square.

Times Square Hilton, okay, and if you were to, just for argument's sake, refinance that today, what kind of a rate do you think would be available?

Okay, I'll caveat this with this is based on our discussions with lenders recently. We haven't done any secured financing recently, but current indications would be on an asset like that, we could get in excess of $100 million to $150 million of proceeds. That's well below what we could have gotten a year-and-a-half ago on the asset. And the rate on a mortgage such as this would range from LIBOR plus 300 to LIBOR plus 450.

Okay, great, and are you talking about it being a floating rate, or that being a fixed rate?

Those are floating rate terms.

Okay.

On a fixed rate, it generally is, would be today 300 to 450 over, call it the ten-year T, and the existing rate on that piece of debt is--

--592. Okay, so your rate would be you think LIBOR plus 300 to 400, or on fixed, ten-year Treasuries plus 300 to 400.

Yes.

Okay, and then you said you had 11 unencumbered hotels. Would you give us the last 12 months cash flow on that?

We have not reported that out, Dennis. Let us look into maybe providing that in the future.

Okay, good enough. And then of the $67 million left of share re-purchasable, does that sunset at the end of the year?

Yes.

So you use it or lose it, okay. And then lastly, in the press release, said the Company invested $20.9 million in capital projects. Is that all CapEx for the quarter?

Yes.

That was total CapEx. Okay great, thank you very much.

Tom VanBuskirk, Argent Funds.

My question has been answered. Thanks.

Chris Woronka, Deutsche Bank.

You can't provide '09 guidance, how should we think about cost per occupied room, and I assume you're going to remix business a little bit, which could impact the rate. I mean, how are you guys internally with Sunstone hotel properties? Is there any way to kind of ballpark targets there?

Chris, I missed the front end of your question. Was it just basically about how we're estimating costs, or something to do with revenues?

Well, I mean both. I mean I assume the business is going to be remixed a little bit next year. You might group up a little bit in certain cases, and take a little bit more discount business, and so how do we think, just how do we think about your overall, I guess, revenue management and then mix of occupancy RevPAR without numbers kind of directionally, and what, how that's going to impact your cost management strategy?

I think, as you pointed out, I think it's pretty difficult for us to talk about individual rate strategy or property strategies because it's really a street corner by street corner, asset by asset. So there's no real general direction that I can give you that's applicable universally across our properties.

In terms of the expense line items that, we've rebid out our insurance, and so there's some things we can look into the future, but in terms of wages and other things, there's really not a lot of barometers that I can look to. Everybody is grouping up out there. The question is whether a group is really accretive to a hotel. Sometimes, there are businesses out there now that actually aren't down as much or maybe flat with last year, and so grouping up is a common, popular, sometimes useful strategy, but not always applicable.

So sorry, I don't have a direct answer for that because we're really beginning budgets in some cases beginning of 2009, certainly at the end of this year. So it's premature for me to do any more to speculate than what I have.

Okay, fair enough.

David Loeb.

Hi, sorry about the printer noise in the background; lots of earnings today. I was a little surprised at the coverage language in the press release. It seemed like you guys or your lawyers went out of your way to make sure that you discussed what the risk was of the covenants. Is there anything that's materially changed that's led you to that additional concern, other than just the fact that the stock is down and the market is down and people are very worried about that?

Hey David, it's Art Buser. Having listened to a number of calls and transcripts, it seems every call somebody asks about line of credit, so we just thought the right thing to do was we're going to be asked about it, why not give people full detail on that up front. And that was really the reason behind it.

Well that's great, and we definitely appreciate that level of detail.

Ken, in that covenant, among the covenants is a requirement for an unencumbered pool of assets. Is that the 11 hotels, or a sub-set of the 11 hotels?

That is the 11 hotels. There are ten hotels in that pool. One hotel is not pledged to the facility.

Okay, so you could borrow against the 11, but it sounds like what you're saying is that's sort of in lieu of the credit line.

That's correct, that's correct.

Okay, and finally just kind of a math thing. In looking at your results relative to your guidance, you were under in comparable RevPAR, you were worse than expected, worse than expected in margins, but came in right in the middle of adjusted EBITDA. To me, the obvious answer there is that your G&A was less than you expected. Is that right, or was there something else that I missed or something else about the nature of the guidance?

David, you're hitting the nail pretty close on the head. G&A did come in below, and as Art mentioned in his comments, G&A has come in year-to-date down 8% relative to where we were budgeting and forecasting. We have also saved some money on our interest expense during the course of the quarter -- I'm sorry, we had higher interest income during the course of the quarter, which factors into our EBITDA, and then our laundries also outperformed relative to forecast. So a few minor items, but they all worked to enhance the EBITDA number during the quarter.

That's great, little things count. That's all I had. Thank you very much.

And I show no further questions in the queue, so I'd like to hand the call back over to management for any closing remarks.

Again, this is Art Buser; thank you very much for calling in. I look forward to speaking with you next time. Thanks.

And ladies and gentlemen, this concludes the Sunstone Hotel Investors third quarter conference call. You may now disconnect. Thank you for using ACT Conferencing.