Sunstone Hotel Investors Inc (SHO) 2008 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to the Sunstone Hotels Investors fourth quarter and full-year conference call. (Operator Instructions)

I would like to turn the call over to Bryan Giglia, Vice President of Corporate Finance of Sunstone Hotel Investors. Please go ahead sir.

Thank you. Good morning everyone and thank you for joining us today. By now you should have received a copy of the earnings release. If you do not have a copy, you can access it on the Investor Relation;s tab 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 described in our prospectus 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 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 the 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 the earnings release that we filed yesterday. With us today are Art Buser, Chief Executive Officer, and Ken Cruse, Chief Financial Officer. 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 Art. Art, please go ahead.

Thanks Bryan. I want to start off by thanking the 60 some people who have called into this conference call and a little over 100 that have dialed in on the internet. Now let's dig in today. This is my first call as Sunstone's CEO. Let me say a few words before we dive into the results. I met many of you at NAREIT and what I said there is what we are stating now. I look forward to forging and maintaining an authentic relationship with you, our investment community.

One of the most important characteristic in my mind of an authentic relationship in this context is frequent, transparent communication, I hope you felt that. These are challenging times, no surprise to anybody here. But I am optimistic. I'm optimistic that we have the portfolio and the balance sheet that I have called Super Bowl quality team that delivers returns to our stockholders. My intentions and expectations are that Sunstone will be viewed as a Company that exists and outperforms. With that, let's start the call.

During today's call, we are going to cover five topics. First let's talk a little bit about the current economic environment, what we are doing to maximize cash flow. Secondly, our fourth quarter and full-year operating results. Third, provide preliminary estimate of January's RevPAR results. Then Ken will discuss our fourth and fifth topics, putting position to debt policies.

Let me start with a review of our current operating environment and what we are doing about it. We all know the lodging industry continues to be directly impacted by the global economic crisis. That lodging fundamental continues to decline. We expect 2009 to be one of the most challenging years in recent memory in the industry.

Throughout 2008 we worked closely with our managers to right size the cost model of each hotel as well as here in our corporate overhead. At the same time and at as a defensive measure, we continue to maintain higher than traditional cash reserves. I can't tell you today the breath or depth of what we are facing, nor can I tell you what the market is going to look like on the other side. What I can tell you is this - - first, until there is more visibility we are going to continue to release operation updates to provide the investment community with current top line performance and other information. We hope you find these updates useful and as a means to better understand how Sunstone is performing relative to the market..

Second, when we work closely with our operators to right size the cost model participation of what we saw in meaningful decline of RevPAR 2009, no costs was off-limits. We carefully reviewed every line and challenged the number of expenses that were previously declared to be fixed or untouchable. This review resulted in over $13 million of cost expense reductions approximately $4.5 million in management and hourly staffing reductions.

Third, we carefully reviewed cost at our corporate office and made have several staff reductions and other cost reductions. Cash conservation is one of our goal and is something we preach to our properties and we practice at headquarters.

Fourth, our balance sheet is strong with significant liquidity. We said that often (inaudible). We have no near-term debt maturities and we are holding more than $220 million of cash. We believe our management team and position the Company in the current downturn and we will continue to focus on maintaining liquidity. That's not enough - - it's just not enough to work to right up the current session. Our intention is to be in the position to capitalize on future opportunities.

Now let me turn to fourth quarter and full-year 2008 results. The fourth quarter adjusted FFO per share was $0.76 and adjusted EBITDA was $70 million. These figures include approximately $1.1 million, of severance expense related to staff restructuring at the hotel and corporate level. For the full-year, adjusted FFO per share was $2.79, 2.4% below 2007. Adjusted EBITDA was $285.1 million, representing an 8.1% decline in 2007. I believe we are going to look back at 2007 as a banner year for sometime.

For our 2008 total hotel portfolio, fourth quarter RevPAR decreased by 11.4% and that was driven by 4% decrease in ADR and a 570 basis point decline in occupancies. Although fourth quarter performance was close to the US core upscale average of 11.1% decline, it's disappointing to not outperform that measure.

Full-year RevPAR, decreased by 2.2%, driven by a 250 basis point decline in occupancy. That was offset by a 1.1% increase in ADR. So in past calls, let me briefly note that comparable portfolio RevPAR which excludes rents on Baltimore, Orlando in terms of the two noncomparable hotels. For this portfolio, fourth quarter RevPAR decreased 10.6%, slightly better than the US upper upscale performance. Full-year decreased by 2.3%, driven by 270 basis point decline in occupancy and offset by 1.2% decrease in ADR. Beginning with first quarter of 2009, all 43 of our hotels are expected to be included in the comparable portfolio.

With that being the overall being is overall comment, let me now talk about fourth quarter RevPAR by region compared to last year. In California properties were down 12.3%. LA, Orange County area hotels were down 11.7%. San Diego hotels were down 13.1%. San Diego continues to be a challenging market with the new convention Hilton hotel now open, we expect the challenging environment the continue.

In the midwest region, our Mayo Clinic portfolio in Rochester continues to outperform Q4 RevPAR for our four hotels there. It was up 9%, driven in part by increased demand for our higher ends hotel and [motels] on our international (inaudible). The Midwest region itself was down 1.8% to last year impacted by weakness in Chicago and Minneapolis. In the Mid-Atlantic region, it was down 13.8%., again there a primarily a result of weakness in New York and Boston. Southern regions RevPAR decline at 10.6% which reflects weakness in Atlanta and surrounding markets.

Total hotel operating margins for the quarter decreased by 290 basis points, an impressive performance. Validation of our cost containment initiatives were successful in mitigating margin erosions. Q4 margins were negatively impacted by approximately 40 basis points by the impact of severance charges related to staffing reductions, restructuring on our property and corporate office. Including the one time severance expense, we were able to hold margin decline to 250 basis points, an 11.4 RevPAR loss. Again, impressive results. Very pleased about that.

Our properties did an outstanding job anticipating top line decline and proactively reduce declines and proactively reduced the costs appropriately. Staff reduction restructuring that we implemented in December, we expect to drive continued cost savings throughout 2009. We believe we have the lowest management fee structure among our lodging [lead] peers. Our management fee expenses including a set of management fees were $7.8 million for the quarter or approximately 3% of gross revenues which again compares very favorably to our lodging [lead] peers.

Let me move to item three, January operations update and again this is going to be brief, and in lieu of separate operations updates that we would do for January, we are just going to give a preliminary update on performance now.

RevPAR was down 10.6%, driven by a 0.8 decline in average rates and 670 basis point decline in occupancy. Our DC area properties turned in exceptional results in January as a result of the Inauguration associated business. Our DC Renaissance more than doubled January RevPAR as the third January a year ago.

We intend to issue operations update in March, similar to what we done in the past will which contain final top line results for January and February. Before I hand it off to Ken, let me end where I started by saying we believe we are well positioned to weather this unprecedented and uncertain economic environment. We will continue to focus our efforts on cutting costs and ensuring that our properties have the necessary resources to creatively source new business and drive top line revenues.

We have a recently renovated high quality portfolio located in many of the top gateway US markets we expect will continue to out perform US upper upscale markets in the long-term. As I mentioned, we believe we have significant liquidity to weather the current economic turmoil. To do the sports metaphor, we said a few times, but it is worth restating. We are playing defense. We're waiting to play offense. For folks seeing our efforts on maximizing our portfolio cash flow at the same time we are preparing ourself to be well positioned to take advantage of opportunities as they might arise.

With that I would like to turn the call over to Ken to take you through capital structure and liquidity. Ken?

Thank you very much, Art. Good morning or good afternoon everyone as the case may be. Thank you for joining us today. I will spend a moment going over our capital structure and liquidity as well as our dividend policy before we open up the call to questions.

First and foremost and to echo some of Art's comments, we believe that the liquidity provided by our excess cash, and our absence of near-term debt maturities as well as our portfolio's limited capital needs, are critical advantages in today's uncertain environment. We finished 2008 with approximately $220 million of cash on hand including restricted cash. This is a $109 million increase as compared to the year ended 2007.

As Art outlined, we are focused on a variety of measures aimed retaining and, if possible, increasing our cash reserves during 2009. As of the end of 2008, our leverage ratio calculated as the ratio of our debt less cash to total assets was approximately 53%. We ended the quarter with fixed charge coverage ration as defined in our unsecured credit facility of 1.8 times.

100% of our $1.7 billion of debt is subject to fixed interest at an average rate of 5.5%. The average term to maturity of our debt is more than six years and this is assuming our 4.6% exchangeable senior notes will be redeemed in January of 2013 rather than at maturity in 2027. Our closest debt maturity is nearly two years away in December of 2010 which is the $81 million mortgage on our Hilton Time Square.

Even in today's challenging financial market we believe would be able to refinance this hotel at or above its current debt level. Beyond that, we have a well staggered maturity schedule extending through 2021.

I will spend a minute now on credit facility covenants. As we mentioned in the past, the bulk of our debt is in the form of single asset mortgages which do not contain corporate financial covenants. Our $200 million credit facility, which is undrawn, is subject to certain financial covenants including a minimum corporate fixed charge coverage ration of 1.5 times.

As noted, we finished the fourth quarter above this threshold with a fixed charge coverage ratio of better than 1.8. However, if we were to continue to see declines in the corporate EBITDA, we believe we may not achieve this covenant threshold at some point during the year which, absent of amendment, would mean we would lose access to the credit facility. In advance of any such covenant failure in addition to other alternatives, we may seek to renegotiate the terms of our credit facility, restructure the facility into a secure line, or we may simply elect to terminate the credit facility as our business plan does not contemplate its use for the foreseeable future. We own 10 unencumbered hotels that we believe we could borrow against should the need for additional cash arise at a time when the credit facility may be unavailable.

Moving on to dividends - - Yesterday, we declared regular dividends on our series A preferred stock and our series G convertible preferred stock. We did not declare a dividend on the common stock. While we believe we have sufficient cash reserves, the decision not to pay a first quarter common dividend was made after considering the highly uncertain economic environment and after balancing liquidity and capital preservation goals with our goal of distributing 100% of our taxable income to our investors We believe this decision is what is best for the Company and what is in the long-term interest of our stockholders. I would like to oint out that the level of any future quarterly dividends will be determined by our Board of Directors, after considering long-term operating projections, expected capital requirements, projected taxable income and the risks affecting our business.

Finally, we recognize that in these challenging times, the conservative approach to capital allocation, appropriate levels of risk tolerance, strong communication and sound judgment are paramount. As Art indicated, our collective focus is on preserving capital and developing a foundation for strong performance through efficiency measures, deleveraging initiatives and disciplined capital investments. We truly appreciate your continued support of Sunstone and we look forward to continuing to develop your loyalty and trust in 2009 and beyond.

With that, I'll turn the call back over to Art to wrap-up.

Thanks Ken. Again, we appreciate everybody's time and your continued support of Sunstone. I have mentioned that I am very proud of what this team has accomplished, particularly in terms of market. I look forward to speaking to everybody who is on the call today and in the coming months. Before we open up to questions, I have talked often about the Super Bowl quality team so I think it's important to have more than the quarterback and wide receiver showing up on the call. So today, Mark Hoffman who is head of Asset Management is here with us today as well. Operator, please go ahead with questions.

We will now begin the question and answer session. (Operator Instructions) Our first question is from Chris Woronka with Deutsche Bank.

Good morning. Couple of quick ones - - first, could you tell us maybe what the impact of Washington DC was on your overall January numbers?

Sure. In terms of RevPAR?

Yes.

Yes, the impact of the Inauguration on January Inauguration was about 700 basis points, so if we said January was down 11, without DC, it would be down 17.5, almost 18.

Okay. Great. As you kind of look out, are you seeing unusual in terms of the group cancels or booking windows? Just trying to get a sense to things changing pretty rapidly and what you're seeing and if that has anything to do with the decision not to give much guidance for '09.

Nothing unusual for the current environment compared to 3 years ago I guess I would see it as unusual. Let me get to the heart of your question, which is, Chris, maybe why aren't we providing guidance? Is that at the heart of it?

I think -- Yes. I can see the positives and the negatives of not. Just curious as to whether there was a further decrease in visibility since I guess last time you guys officially gave guidance was back in the fourth quarter guidance in December.

Yes. Let me tell you what I do know, because again we don't want to speculate. On the last call we talked about pace being down about 7.5 percent. What was interesting was occupied rooms were down 9.5, but rate was up 2%. Right now that has continued to soften. Pace was off 14%. And there again, occupied rooms are down 15% but rates up 1. If you look back at our previous call, you see that trend of deteriorating pace, I think what is interesting to note, it's been mostly not by rooms.

Okay. That's helpful. Final one is on the - - Ken, can you give us a share count? Where you are going to be for the first quarter because you will have that stock dividend in there, right?

Yes. Sure. After the stock dividend, total shares, and this will include the affect of the conversion of series [D] is up 58.2 million shares.

Okay. That's great. Thanks, guys.

Thank you.

Thank you our next question is from the line of David Loeb with Robert W. Baird. Please go ahead.

Art, good morning and thank you for addressing the guidance questions so I didn't have to ask it. Can you give us a little bit of idea about what you expect for capital spending? I may have missed that, but I don't believe you said anything about what you think the CapEx outlook is.

David, an important question for you and me and it is somewhat related to guidance. When we set our capital spending, a lot to do with what our view of the year is. Right now because I don't have a view on the year, we are hesitant to say what your number is. What I can tell you is, it is going to be less than what 2008 was. And you know and in looking at our past statements, our impounds are $40 million, so clearly that be over, under, and somewhere between there. I know that is a bit of a wide gap, but we haven't set the number until we get more clarity. Until that time, next question is what are you doing? To the extent there is fire light safety code issues and things that must be done we are clearly continuing to spend money. And we don't forget we are in the hotel business. Hotel guests expect that things are in decent condition. We are doing what we have to do, but aside from that, we are really taking a wait and see in CapEx. I'm sorry, I can't give you a number because I don't have a number yet.

You got a nice comfortable restricted cash reserve. Will most of what you are spending, at least in the near-term, come out of that reserve as opposed from your freely available cash?

Don't know for sure. But thinking about it, the majority ought to come from that.

Okay. And a couple for Ken. Taxable income is almost impossible for us to estimate. Clearly you are not giving us guidance. I guess is question is do you see a scenario where your taxable income will be greater than what you would pay assuming you pay full convertible preferred and straight preferred dividends.

I guess the easy answer to that is, yes, we could see a scenario where we would have distributable taxable income. If you looking back to '08, I think we are going to keep with the theme of looking back of speculating on '09. If you look back to '08 we had about $84 million of operational taxable income and we had another $29 or so million of gains that were distributable. Demanding on what we do this year in terms of capital markets and asset sales transactions, you could see a distributable arising from that. Operationally, we are not going to comment on what we expect to come out for taxable income. If you use 2008 as a baseline, you can use that 84 million as your flex point.

Okay. One final technical question. We noticed in the 10-K that there was not a table that actually listed the individual mortgages and which assets they were tied to. Is there some reason why that was out or is that something you can provide to us.

We have the scheduled at the very end of our release?

Yes, it just doesn't tell us which hotel goes with which mortgages.

We haven't provided that level of detail in the past but that's certainly something, David, we can consider providing.

Thank you very much.

Thanks David

Thank you. Our next question is from the line of Dennis Forst with KeyBanc Capital Markets. Please go ahead.

I wanted to ask a question about the corporate overhead. Art, you said there had been cuts there. I don't think there will much in the way of severance this year. Can you give us a general idea of what corporate overhead is going to look like this year?

In terms of just a dollar amount or in terms of - -?

Yes, dollar amount. It looks like it's been, last three quarters running around $4 million a quarter. I would suspect it could even be a little less than that this year.

We should be down in terms of cash, down 3.5%. Total should be 17 million.

Okay. 17million or so full-year?

I will add the technical term, -ish, after that.

Okay. I wanted to understand the total portfolio occupancy and ADR for '08 what we are comparing against. We now have 43 hotels, what is it around 14.5 thousand rooms. Can you walk us through the prior year occupancy and ADR's by quarter?

Prior occupancy and ADR by quarter for either the comparable or noncomparable?

No, just the total 43 properties.

How about if I gave you RevPAR?

Okay. I can live with that.

For 2007 or you want 2008?

2008 compared with our model of '09.

114 and are up a little less than 3, 3% one year-over-year. Q2 was low on 130s, like 132. That was a little under 4% year-over-year. Q3 was 126. We started to see the slide we are almost 2% year-over-year. And then Q4 was 107. Again that was 11.4%.

Down. We got the full-year numbers are in the K, all spelled out. Okay. Last question for Ken - - there was a covenant that you have on the series [T] preferred that might prevent you from paying it or such. Can you walk us through what that covenant is?

Sure, I will give you a moment on the series T. We didn't spend time on the call today because we view that as a less restrictive and less imminent covenant concern as compared to our credit facility.

Series T has a couple of financial covenants as a leverage ratio. And that is calculated debt to EBITDA a maximum of 8 times. There also has a fixed charge coverage ratio of 1.15. The way it's worded in the series T is much less restrictive than the credit facility. We would need to reach a covenant and fail a covenant for four consecutive quarters before we have what's called a financial ratio violation.

If a financial ratio violation were to occur, we would end up having a couple of different restrictions. We would paid a little bit more in interest on series T, the 50 basis point in the interest rate. The series T holder would have the right to elect one board member from the Company. And we would also have certain other restrictions such as a restriction on paying dividends on the common stock until that time that we clear the financial ratio violation.

That's perfect thank you very much.

You're welcome.

Appreciate it.

(Operator Instructions). You next is from Michael Salinsky with RBC Capital Markets. Please go ahead.

I know you guys are not giving guidance and you have done a very good job on the expense end over the past four quarters here. Just given the expense reductions we have seen thus far in 2008 How much is really left to eliminate in 2009? Just looking at that - - I know you guys aren't providing guidance, but can you give us a sense of what kind of flow through. if RevPAR is done 10%, what kind of impact do you expect to see on the margin front, just given what you guys have rolled out thus this year?

So it's a - - Mike, let me repeat the question. If we saw 10% further RevPAR decline, what might we see in EBITDA?

What might you see on the margin front? How much do you - - What is the flow through essentially on the margin front?

Again tough to calculate, it's somewhat store by store. I think in the past we talked about that for every 1% decline in RevPAR, that the result decline in EBITDA could be kind of 2 to 3 times. That doesn't tell you what the margin is, but it at least tells you what the gross EBITDA is. So that indicates to you that what we expected - -there has been a decline in RevPAR and we all know there is diminishing returns. The first dollar lost in revenue it is easy to cut expenses. And that continues to go, it is more and more difficult.

I think as you heard on the call, Mark and his team did a great job of continuing to find expenses and make cuts. So I would expect that kind of that 2 to 3 times reduction in EBITDA would likely still hold, again, depending on is it 100% ADR? Which hotel is involved? So, I know I didn't answer directly in terms of how much it would change EBITDA margin but it gives you a sense of where the EBITDA would change. I think staffing reductions should be, we are anticipating about $4.5 million in cost savings for 2009 based on what we done thus far. Mark, do you have anything you would like to add to that?

Thank you Art. Mike, when we built the cost models for 2009, we were very cognizant of what could happen and we were very proactive in working with our partners. We have taken out approximately $13 million in pure cost model changes for operating these hotels. It's not a cost reduction from the normal if a hotel goes from 80% to 70. That's normal cost. It's really remodeling the way the hotel is run. So we took out a pure $13 million in additional costs which should help us weather the storm of what the RevPARs are as they decline.

On the expense line, what are you guys looking for utilities and insurance and real estate taxes for 2009?

We haven't given that level of detail. Again, part of the reason why we're not giving you clear guidance on top line is we've We haven't given that level of detail. Again, part of the reason why we're not giving you clear guidance on top line is we've redone the budget a couple times and clearly as occupancy changes some of those expenses that do bury along with occupancy are going to change as well. the budget a couple times and clearly as occupancy changes some of those expenses that do bury along with occupancy are going to change as well. Unfortunately I can't give you a lot of guidance on that.

Secondly, the fourth quarter results and guidance you provided originally, does that include the guarantee in there?

Yes, it does.

I did include the guarantee. Did that come in more or less than expected or was it in line?

It was in line.

Pretty much in line. Okay. Finally, several of your peers in other sectors have been out there buying their converts back as a way to delever. Has that been contemplated and would that provide you with liquidity to maintain the covenants on your line if you were to do so?

We are not a buyer of those. Our goal was to maintain and build cash reserves. Never say never, but something that we are not a buyer of now.

Thank you.

Thank you. I show no additional questions at this time. Please continue.

Great. Again, thanks to everyone for listening in. I look forward to our next call which will be scheduled for sometime in March.

Thanks again, good-bye from Sunstone.

Ladies and gentlemen, this concludes the Sunstone Hotel Investors fourth quarter 2008 conference call. You may now disconnect. Thank you for using AT&T conferencing