Sunstone Hotel Investors Inc (SHO) 2009 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Sunstone Hotel Investors first-quarter 2009 earnings conference call. At this time, all participants are in a listen-only mode. Following today's prepared remarks, instructions will be given for the question-and-answer session. (Operator instructions.) As a reminder, this conference is being recorded today, Thursday, May 7th, 2009.

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, R.J. Good afternoon, everyone, and thank you for joining us today. By now, you should have all received a copy of our earnings release which was released this afternoon. 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 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 factors in evaluating our forward-looking statements. We also note that this call may contain 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.

With us today are Art Buser, President and Chief Executive Officer and Ken Cruse, Chief Financial Officer. To begin the discussion, I'd like to turn the call over to Art. Art, please go ahead.

Thanks, Bryan. Good afternoon, everybody, and thanks for joining us today. During today's call, we're going to cover three topics. First, since we covered the top line results for the first quarter a couple weeks ago on our business update, I'm going to provide a quick review of the quarter, next I'm going to discuss demand trends, and finally provide an update of the cost containment initiative at our hotels and the corporate office. I'm going to hand it to over to Ken who is going to provide an update on our financial initiatives, including our ongoing notes tender and consent and our overview of the terms we've agreed in principle with our lead credit facility lenders.

Let me begin with our current operations update. As was said on our prior update call, total RevPAR was down 16% for the quarter. Our group booking pace is down 18.6% in terms of total revenue versus the same time last year which reflects a 17% decline in occupancy and a 2% decline in rates. While at this point, we are not prepared to declare that we see an end to the current downturn, and we are not seeing signs that the rate of decline in our group booking pace is moderating, we are seeing signs of stabilization in our transient business. For example, our premium transient mix, which represents the travel activity of our highest rated business travelers, declined significantly in the fourth quarter, but has recently shown signs of stabilization and even modest improvement.

Now, that said, our portfolio did see a 24.8% decline in RevPAR during the month of April. However, some of that decline was related to the year-over-year timing of the holidays, really making it a difficult comparison. Because of the ongoing economic uncertainty and the lack of visibility, we continue to focus on controlling our expenses, both at the corporate and property levels. I'm very pleased with our ability to cut costs and deliver impressive margins in the context of declining revenues.

Our property level cost-cutting initiatives resulted in a remarkable 58% hotel operating profit [save-through] for the quarter. Our asset management team continues to work with our operators to find new, more efficient ways to run our hotels. The team is currently in the process of evaluating additional energy, food and beverage, housekeeping and staffing initiatives.

To give you an idea, here's a couple examples of how we're eliminating costs at the property. First, we're working with our managers to have them renegotiate many of our third-party contracts. Secondly, we've re-engineered our menus in both catering and restaurant outlets to minimize menu offerings focusing on high demand, high profitability items which result in less waste and lower food costs. And third, we've begun to roll out a comprehensive beverage control system that has resulted in significant beverage cost reduction.

Our food and beverage cost control resulted in a 260 basis point reduction to food and beverage costs this quarter alone. And overall, the margin decline of 300 basis points from 25.8% to 22.8% on 16% RevPAR, I think that's good work.

As we find new innovative ways to reduce costs at our individual hotels, our asset management team has done a great job of transferring best practices across our portfolio. We take a lot of pride in our asset management success and believe we'll be able to maintain the cost reductions made in Q1 throughout the remainder of 2009. And while some of those costs we've eliminated may eventually work their way back into the system, over time, it's our view that the magnitude of this downturn has forced operators to redefine how they run our hotels by questioning every cost on the P&L. We believe this will result in lasting efficiencies.

Over the past year, we made significant staffing reductions at our properties to right-size each hotel's overhead to reflect the challenging operating environment. We have also closely evaluated our corporate staffing, taking a magnifying glass to each department, ensuring that we are properly staffed there as well. Through that process, we eliminated 17 positions, or approximately 40% of our staff, representing an annualized cash overhead expense savings of $2 million to $3 million. This was not an easy decision to make. But in the long run, it was the right decision for the company. We thank all of the employees for their hard work and the contribution they've made to Sunstone. During the second quarter, we'll incur a one-time severance charge of approximately $1 million.

And with that, I'd like to turn the call over to Ken to provide an update on our financing initiatives. Ken, go ahead.

Thank you very much, Art. Good afternoon, everyone, and thank you for joining us today. Today, I would like to cover two topics. First, I'll provide a brief update on our exchangeable notes tender offer and consent solicitation, and then I'll provide an update on our credit facility amendment process.

Earlier this week, we amended our ongoing offer to purchase any and all of our 4.6% senior notes by increasing the offer price from $600 per $1,000 note to $700 per $1,000 note. This change was made on -- based on feedback received from note holders and in reaction to improvements in the general market conditions. The price we have offered equates to a 48% premium to our recent open market purchases. As part of the tender offer, we are also seeking to amend the notes' indenture to gain flexibility with respect to our subsidiary debt. This week, based on bondholder feedback, we tightened up the language related to the proposed amendment and increased the standalone consent fee from $5 per $1,000 note to $15 per $1,000 note. The tender offer is now set to expire at midnight on May 19th.

Recognizing that the credit and equity markets have recently improved off the lows we saw earlier in the year, we continue to analyze a variety of capital funding alternatives. We currently intend to fund the amount needed for the tender offer with one or more of the following; cash on hand, a draw on our credit facility, new secured debt or one or more capital markets transactions which may include senior debt, preferred equity or common equity. One final comment on the tender offer; because we have a formal offer underway, we will not be taking questions related to the tender offer during today's Q&A session.

Moving on to our credit facility process, I am pleased to announce that we have come to an agreement in principle with our two lead banks representing the required vote to make an amendment to the facility. The terms we have agreed upon are as follows; the amended facility will have $85 million of availability secured by first mortgage liens on five hotels. I should note that the benefit of these mortgage liens will inure solely to the credit facility banks which will serve to put the credit facility in front of any exchangeable notes remaining outstanding after the close of the tender offer.

Our amended facility will provide significant covenant relief, reducing our minimum fixed charge coverage ratio from 1.50:1.00 to 1.00:1.00 with the ability to go as low as 0.90:1.00 for up to four consecutive quarters. Similarly, our maximum leverage covenant will now be set at -- will now be a net debt to EBITDA calculation set at 9.5 times with the ability to flex to 10.5 times for up to four consecutive quarters. We believe this terms package will enable us to maintain access to the facility for the remainder of its term and will improve our liquidity and financial flexibility.

To wrap up and to reiterate Art's comment, while we believe it is too soon to call an end to the down phase of the cycle, we are seeing some signs of stabilization in our business. And we are encouraged by our operators' ability to cut costs and maintain margins. We intend to continue to keep you apprized of our business trends via intra-quarter business update calls.

That concludes my comments. Thank you very much for your time today. We truly appreciate your continued interest in Sunstone. And I'll now turn the call back to Art to wrap up.

Thanks, Ken. And with that, I'd like to open the call up to questions. R.J., please go ahead.

Thank you, we will now begin the question-and-answer session. (Operator instructions.) Our first question comes from the line of Jeff Donnelly with Wachovia. Please go ahead, sir.

Good afternoon, guys.

Hey, Jeff.

Hey, Jeff.

I guess, Ken, first question for you, just concerning your credit facility, have you seen any, I guess, significant lenders shake out as you've looked to modify this agreement or, conversely, others come into the agreement?

Not at this point. So far what we have offered, I think, is a pretty balanced package. The terms obviously are significantly easier than the terms we've got in our existing facility. But by providing the collateral -- direct collateral in the form of mortgages, there's kind of a good offset from the lenders' perspective. So at this point, we have not seen any banks fall out.

But at the same token, I guess none of them necessarily -- no new entrants.

Correct.

Okay. And then I know you said in your remarks that you can't speak about the notes tender offer, but perhaps you can answer this question. If not, that's -- I understand. But can we perceive the need that -- to increase that offer price maybe more broadly as a sign that there's firming confidence in the hotel debt, maybe some stabilization in debt pricing for hotels? Or is that not necessarily related as directly?

No. I think, again, as I said in my comments, the change in the price was really related to just improving conditions in the general market, both the credit and equity markets.

I guess -- but, I mean, beyond just pricing, per se, do you think that going forward you're going to maybe see the purse strings open up a little bit more from the lending community as it relates to hotel finance, or has it not quite gotten to that point yet?

We are seeing some encouraging signs. We've been out with, as we mentioned on our prior call, some packages on secured mortgage debt on several of our unencumbered hotels. And we are seeing, at the secured debt level, some much more compelling terms come across our transom. So yes, I think there are some early signs of relaxing in the credit markets as it pertains to hotel debt.

Just one last question, actually, maybe related to this, for Art. I know transactions are scarce. But are you seeing any sales get consummated around the country that might give you some perspective on pricing that has applicability to segments of your portfolio? And I guess, where are they either for key or trailing cap rate pricing sorting out?

Yeah, Jeff, unfortunately, I have yet to see anything that's traded that really gives us an indication of where buyers' minds are, where they view cap rates are, where they view RevPAR growth or decline. So yeah, I haven't seen anything that I think is kind of a bellwether of what's going to happen.

Or maybe another way of asking it is, I guess, where -- do you have a sense of where asking prices are, and I guess as a result, where deals aren't getting consummated?

Where they aren't getting consummated.

I mean -- meaning that if someone's asking X, and if they're not getting done at that level, then clearly, there's not support at that level. Is there any kind of broad-based measure that you see on that side?

Yeah, no. I mean, people talk about the bid-ask spread all the time. And part of that is whether there is going to be a pip when a property is being sold, existing financing versus financing one may put in place. And so those gaps can be pretty wide. So there's no general rule of thumb I could tell you that's really applicable or would apply to all deals.

Okay. Thanks.

Sorry. I know that's not the detail you're looking for.

That's okay. Thank you.

All right. Thanks.

Thank you, sir. Our next question comes from the line of Chris Woronka with Deutsche Bank. Please go ahead with your question.

Hey, good afternoon, guys.

Hey, Chris.

Hi, Chris.

I'll ask my usual expense question. You know, I think we've all been impressed with your flow-through and with some of the others. And I guess, Art, you shared some examples with us. But as you begin to think about recovery and occupancy maybe at some point comes back a little bit, how do you really -- what percentage of those costs can really stay out, and kind of how long can they stay out? I am just trying to get a handle on where some of the sensitivities are there.

Yeah, great question. And it's something that we're really focused on, which costs are permanently out of the system and which ones are simply being taken out for the interim. And I think a lot of that depends how the markets recover, kind of which subsegments and what customers come back and at what pricing. So it's difficult to say and early to say what might happen. I mean, clearly, when a hotel drops materially in occupancy, the reductions in costs or staffing are kind of more varying with the loss of business that ought to come back with the increase in business. So I don't have a great rule of thumb for you, or kind of going line by line. You've seen some of the brands.

Holiday Inn, for example, announced that they were going to change their terry from 100% cotton to a 90/10 blend. I mean, there's all these little miniscule things like that. And so I don't have a sense it will be a -- it will be a great situation when the market's getting better, and we're wrestling over which ones do come back in. So I can honestly tell you I haven't thought a lot about it.

But I think back to the days when I was in operations, and there was a floor shampooer position, and that person just did two or three floors. And I think about all the positions that have been wrung out of hotel operations over the past 20 or 30 years, and it's come over times like this. And so your point's a good one. There are things that will be wrung out of hotel costs that will not reappear. And that's to be seen.

Right. Great. And just one other kind of a theoretical question. How are some of your operators looking at booking group business for future years and taking kind of a lower rate versus what maybe they booked the same business at two years ago versus kind of waiting, hoping things get better and filling in with transients? What kind of discussions are you having with the operators, and how are they looking at it right now?

Sure. Because the majority of our business is transient, you know, there's not a lot of that going on. I'll also tell you that because the booking window is continuing to decrease -- I mean, when I look at kind of the pace for 2010, what I hear from the operators are pace is down, but it's probably because people aren't pulling the trigger. There's really no financial motivation. To the extent they are showing up and pulling the trigger, clients -- guests are clearly looking at today's pricing and trying to project that out into the future.

Okay, thanks.

All right. Thanks for calling.

Thank you, sir. Our next question comes from the line of Kevin Milota with JPMorgan. Please go ahead with your question.

Hey, good afternoon, guys.

Hi, Kevin.

I was just hoping you could talk a little bit about the stabilization trends you're seeing, where in particular you're seeing some of the strength happening by region or by hotel type.

Yeah. Well, yeah, I would like to tell you that stabilization is probably pretty isolated. As I noted in the group pace, we're continuing to see deterioration both in rooms booked and in ADR. What we saw was more in some segments where the higher rated transient guests, who really pretty much almost disappeared through the end of the year, has at least gotten to a point where they stopped and have come back a little bit as a percentage of business, not in absolute numbers. So that is our one green shoot that we can report.

And are you seeing it in any specific regions, or is it just kind of a general commentary?

Yeah, general commentary here and there between a couple different properties, a couple of different regions. Rochester, of course, primarily has been a good market for us, so that's one where we see that more than in other markets.

Okay. I appreciate it. Thank you.

All right. Thanks for calling in.

Thank you.

Thank you, sir. Our next question comes from the line of Dennis Forst with KeyBank. Please go ahead, sir.

Yeah, good afternoon, everyone.

Hey, Dennis.

Hey, Dennis.

I have a great follow-on to that question, and you had just mentioned Rochester. When you said Rochester is still seeing strong business, is it up versus a year ago or just down a lot less than the averages?

The latter. While we didn't go through kind of the regional numbers this year, or on this call, it was down, I believe, about 8, 7, a little bit below 8. And so --

Yeah, I think you gave that on the April 15th call.

Yeah. Yeah, that's right.

Okay.

And then -- yeah, and so you're right. It isn't that Rochester's growing year over year, its parachute's a little bit bigger.

Okay. And did I hear right, April was down 24.8%?

That is correct.

Okay. Anything stand out on either side of that? Was Washington or Houston, Rochester, any of them down single digits and anything down triple digits?

Triple digits, yeah. Yeah, Rochester was down the least.

Single digits.

Yeah, single digit. DC, single digit, would be the best performers.

Okay. And the worst?

I would suspect it would be --

Mid-Atlantic.

Yeah, Mid-Atlantic again. Probably San Diego has been. And when you look at our past calls, has usually been below where our average is.

Okay. And then on cost cutting, I think -- are we getting close to the point where you cannot cut costs any more, and we'll just have to hold our breath that there is going to be some stabilization?

Well, you know, anecdotally, I used to work for a guy who said to me, "As long as you and I get paychecks, there's still room to cut costs." So there is still room to cut costs. We pointed out some of the impressive things that our asset management has found. And I think as hotels really think about, listen, I was 70%, now I'm 65%, maybe I'm 55%. How do I staff that hotel? And should I be running some overtime and contract labor and be really staffed at a lower level with other job combinations?

We were just at one of our hotels where there's a new position we like to call "Chef and B." Instead of having a chef and a food and beverage director, it's a combination person. So you see the guy in chef whites roaming around in the front of the house. You see directors of engineering working multiple properties. In fact, in some cases where it's almost like a mobile engineering truck that kind of goes between multiple properties.

So the level of innovation -- and you see this innovation comes from the people in the trenches. The people in charge of trying to make things happen come up with these great ideas. And our job is to put it through best practice. So the underlying question, of course, with every reduction in revenue, it becomes more difficult. But I'm constantly impressed with the ingenuity in which people in the field constantly find new ways to reduce costs.

Okay. When you said you're doing a lot of renegotiating of contracts with suppliers, that doesn't include the hotel managers, does it?

Yeah. We have to find a new management company that willingly has said, yes, we're going to take less fees and the (inaudible) contract says that you do have to pay us. But we are open to those conversations and do invite those conversations.

Although I would add that they have been receptive to, for example, allowing us to utilize funds that are in the FF&E reserve accounts that would otherwise be locked up in those accounts, applying those towards capital projects that traditionally have been owner-funded projects. And they have also, as we talked about before, have been pretty flexible on brand standards and addressing some of those -- some of our cost concerns through changes in those areas. They have been very flexible, but Art's exactly right, they're not, at this point, opening up the negotiations on their contracts.

Don't you think that would be reasonable, though, if this environment goes on another nine months?

Certainly to the people on this side of the phone, we believe it's more than reasonable. It's the right thing to do. But we're only half of that negotiation.

Okay, good. Thanks a lot.

All right. Thanks again.

Thank you.

Thank you. Gentlemen, there are no further questions at this time. Please continue with any closing remarks you may have.

Again, I want to thank everybody for dialing in and your continued support of Sunstone. We're very, very proud of what the team's accomplished, again, particularly in light of what's gone on in the market, and in particular in what we've done in cost control. And we look forward to speaking with everybody on our call next month.

Thank you.

Thank you again.

Ladies and gentlemen, this concludes the Sunstone Hotel Investors first-quarter 2009 earnings conference call. Thank you all for your participation. You may now disconnect.