Sunstone Hotel Investors Inc (SHO) 2009 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Sunstone Hotel Investors fourth quarter 2009 earnings call. (Operator Instructions). As a reminder, this conference cal is being recorded today, Tuesday, February 23.

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

Thank you, Josh. 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 section 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, Ken Cruse, Chief Financial Officer, and Marc Hoffman will be available to answer questions during the question-and-answer period. To begin the discussion, I would like to turn the call over to Art. Art, please go ahead.

Thanks, Bryan. And good afternoon, everybody, and thank you for joining us today. During today's call, I will review our fourth quarter and full-year performance, and share some insights into the current operating environment. Following that, I will provide a status update on acquisitions program, and our independent hotel management RFP process. Finally, Ken will provide additional detail on our finance initiatives, including our proposed release of three properties from the Mass Mutual portfolio, and our decision to terminate the credit facility. Ken will also provide an update on corporate covenant compliance, impairment charges taken in the fourth quarter, and provide some 2010 expense estimates.

Over the past year, the Sunstone team accomplished a lot. So I would like to start today's call, with a recap. If you look back to our 2008 fourth quarter call a year ago, we were in a very different situation. Our shares were trading at approximately $2.00, common equity market cap was about $90 million, Sunstone owed $1.7 billion in debt, and we held approximately $200 million in cash. During 2009, we focused on improving our balance sheet, refining our portfolio, and improving our operational efficiency. On the balance sheet front, we took a number of positive steps during 2009. We capitalized on market conditions by repurchasing approximately $188 million of our exchangeable notes, at an average discount to par of 38%, resulting in a plus 20% yield to put, and generating an economic gain of nearly $70 million.

We also amended our exchangeable notes indenture to provide for flexibility and restructuring our secured debt. We equitized our balance sheet by issuing $269 million of common equity. We restructured our secured debt portfolio by addressing deficits among five of our non-recourse mortgage loans, collateralized by 15 hotels, and totaling $470 million in indebtedness. As part of that, we eliminated amortization for the next two and a half years, and $105 million Baltimore Renaissance mortgage loan. And we elected to deed back 11 hotels, and are working to secure the release of three additional hotels, which will result in the elimination or repayment of $366 million in mortgage debt. In addition to deed backs, we further refined our portfolio by selling three noncore hotels, for net proceeds of $61.3 million.

And finally, on the operation side, as a result of the diligent efforts by our asset management team and our operators, to redefine our hotel expense structure, we drove profit save-through of approximately 50% during the fourth quarter, as well as for the full-year. What that means is, by making our hotels more efficient we met every dollar of lost revenue with $0.50 in cost reductions. That's remarkable. For the full-year, this resulted in a portfolio margin decline of only 470 basis points. So where does that put us today? Well, as a result of our 2009 initiatives, as well as improving market conditions, Sunstone shares now trade at a little under $9.00. Our common equity market cap is approximately $900 million. We have less than $1.2 billion in well-staggered debt, $181 million of which matures over the next five years. We hold nearly $400 million in cash. And going forward we believe that our new hotel level operating cost models will drive margin expansion, as the growth phase of the cycle begins.

Now I will switch to the current operations update, and unless noted all RevPAR statistics that we provide today reflect our 29 hotel portfolio, which includes the three hotels we are seeking to release in the Mass Mutual loan. For the fourth quarter, our total portfolio RevPAR was down 13.8%, to the prior year. Occupancy was down 1.6 points to 66.4%, and ADR was down 12.4% to $146.55. We continue to see moderation in the pace of decline in demand. And in several markets, we see positive occupancy trends which historically have been a leading indicator of improving demand conditions, which in turn has driven increases in rate. For the full year, our total portfolio RevPAR was $102.09, which was down 18.2% to the prior year. Occupancy was down 7 points to 69.3%, and rate was down 12.1% to $147.32. That level of occupancy makes me optimistic about prospects for increasing rate during the recovery. For the fourth quarter, adjusted EBITDA was $44.8 million, and adjusted FFO per share was $0.18, and for the full-year, adjusted EBITDA was $168.6 million, and adjusted FFO per share was $0.68, all of which are generally in line with, or above the Streets consensus.

So now let's talk about regional performance. Again, for the 29 hotel portfolio during the fourth quarter, our California properties were down 16.8% in RevPAR, LA Orange County area hotels were down 18.6%, when compared to 2008, while our San Diego area hotels were down 12.3%. Our East region which includes Florida, Maryland, Massachusetts, New York, Pennsylvania, Virginia, and District of Columbia experienced a 10.4 RevPAR decline, which is a reflection of the continued softness in Orlando, and signs of improvement in New York, Boston and Baltimore. Our other West region was down 21.9%. Our Midwest region was down 12.3% to last year, primarily as a result of weakness in our Chicago market. But we are bullish on Chicago's long-term prospects. We do expect Chicago to be one of the more challenged markets again this year, through the continued assimilation in new supply, and a weak convention calendar.

We continue to see signs that point to a recovery. In January, 19 of 29 hotels had positive occupancy, and nine had positive RevPAR compared to January 2009. That said, there's still a few assets in challenging markets, such as Houston, Orlando, Chicago, that we expect to lag our portfolio during 2010. It is also important to note the impact the inauguration on our DC assets for the first quarter 2009. January RevPAR was down 14% for our 29 hotel portfolio, excluding DC, January RevPAR was down only 8%, which was meaningfully better than our initial forecast. We continue to see indications in a number of our markets that travelers are again willing to pay top dollar for hotel rooms on nights when markets compress.

At our Hilton Times Square in January, we saw 13 days with higher RevPAR than last year, with nine days that had higher ADR. Even more encouraging, RevPAR for our Times Square so far in the month of February is up, 14.8% relative to last year. Nothing fortunate in the market, with that much occupancy growth that some are still discounting. Looking ahead, we are continuing to see quality booking trends at our properties, which is reflected in the pace improving from down 23 last month, to down 18 currently, consisting of approximately a 14% decline in occupancy, and a 4% decline in rate. More importantly, group bookings for our portfolio were up 30% in January, compared to the prior year. Increasingly, positive signs in terms of improving business, and consumer sentiment point to an impending economic recovery, setting the stage for prolonged period of positive fundamentals in the lodging industry.

So let's shift to acquisitions. We continue to believe that acquiring hotels now will likely create long-term value. While we review acquisition targets, we will continue to take a measured and disciplined approach to acquisitions, which may result in a more lengthy process than in the past, but which we believe will result in the best execution for the Company. Now, in the past we have often responded to questions about acquisitions by describing our pipeline volume. Given that, so far, none of the potential deals on our pipeline have translated into hard acquisitions, we going to spend less time discussing deals we're analyzing, and more time discussing the general condition of the acquisitions market.

After all, anybody can include the entire hotel market in their quote, unquote pipeline. We are seeing as currently there's more buyers, than attractive opportunities. Now, that does not make me any less optimistic about our abilities to succeed in making a creative investments. I am as optimistic today, as I was six months ago. However, what we are seeing suggests the volume of deals could be less than many expected. All that said, when we close on hotel acquisitions, it will not be because we were more aggressive on our underwriting, or more aggressive on our bidding. It will likely be because we have a unique ability to add value where others cannot, and best generate more attractive returns. As in the past we continue to prioritize our acquisition targets on the following criteria. First looking at discount valuations, bedded targets are expected to trade at a discount relative to our current enterprise value per key, and our EBITDA multiple. For the most part, opportunities that we are seeing, have cap rates, have -- excuse me, have lower cap rates and higher prices per key, than current public market, public company valuations.

We are also focusing on asset quality. Those are hotels that generate RevPAR in excess of the Company's current RevPAR, and are higher EBITDA per key. Also focusing on value added opportunities, where we are evaluating acquisitions where selective renovation and repositioning work may add value, as the cost of construction, renovation, labor and materials have declined from peak levels. We are also looking for market concentration where we're targeting assets within our key markets, because economies of scale, ownership efficiencies, improved pricing power, staff sharing may be realized by owning multiple hotels within the same market. We are looking for outperforming markets, meaning we are targeting those markets that we expect to outperform the US average in terms of growth and lodging demand.

And finally, sourcing relationships. We are exploring preferred relationships with current owners of hotel real estate portfolios, who may look to divest of such real estate in the future. We continue to look at hotel acquisitions that meet the above criteria. And, we are also looking at other opportunities, that would be additive, such as assets that is are not upper upscale, could be those that are higher or lower quality. Also, we are looking to investing in hotel debt where there is potential to gain ownership in the underlying asset. Now, debt investments can be very complicated. As we previously stated, if we make a debt investment, it will likely be with a partner that has significant expertise in this area. And looking at hotel debt, the best strategy is to proceed with extreme caution. It seems like every distressed asset fund is now a distressed debt fund, and competition for debt is as intense for hotel assets, and in some cases maybe even more.

Finally, we continue to evaluate various portfolio transactions, and we believe bulk purchases of quality hotels may prove to be the most productive for the Company, as there is seemingly overdemand for single assets but limited demand for large portfolios, particularly those with near-term debt maturities. Let me finish up by talking about the management agreement, RFP. And as we noted on our prior call, in December we initiated a process that analyzed alternative operators for our 15 hotels currently operated by Sunstone Hotel Properties, due to the division of interstate hotels and resorts. We continue to make progress, as we have narrowed the field down to a select few, and continue our due diligence on each of the finalists. We expect the final decision before the end of the second quarter.

Now this process could result in one or several new managers, or possibly no change at all. As we previously stated, our existing management agreements with Sunstone Hotel Properties are cancelable for a nominal fee. And it is our responsibility to take that relatively free option, to validate whether or not we have the best third party manager in place for our hotels. If we find through this process, that is not the case, then we will make a change. And with that, I would like to turn the call over to Ken to provide an update on our finance initiatives. Ken, please go ahead.

Thank you, Art. Good afternoon, everyone, and thank you for joining us today. Today I will provide a status report on our finance initiatives, including our proposed release of the three hotels from the Mass Mutual loan. I will also discuss our decision to terminate our credit facility, and summarize the one-time charges we recorded in the fourth quarter. And finally, I will provide some information related to certain 2010 expense items and metrics. First topic, secured debt. As we have previously disclosed, that we are in the process of concluding our secured debt restructuring program, and we also have previously noted that we were proceeding with the deed back of all 11 hotels, securing a $246 million loan with Mass Mutual. Recently we reached an agreement in principle with Mass Mutual to secure the release of three of the 11 hotels comprising the collateral pool.

The assets we're working to release are the 179 room Courtyard by Marriott Los Angeles, the 271 room Kahler Inn & Suites Rochester, Minnesota, and the 203 room Marriott Rochester, Minnesota, collectively representing a total of 653 rooms. We chose to retain these three assets, because Sunstone is uniquely positioned to retain market efficiencies, by keeping our Rochester and LAX portfolios intact. The remaining eight hotels will be deeded back to Mass Mutual in satisfaction of the debt balance that will remain after the payment of a release price. We expect this transaction to be completed in the first quarter, but no assurances can be given at this time, as to timing, final terms, or if the transaction will close at all. Under the term of our agreement with Mass Mutual, we are unable to take questions on this transaction during today's call. I would like to thank Mass Mutual and its co-lenders for their continued efforts to work with us toward a mutually beneficial resolution, and for their professional and reasonable negotiations throughout this process.

On another secured debt restructuring note, we expect the appointment of our receiver for our Marriott Ontario Airport to occur during the first quarter, at which point as we previously discussed, we will deconsolidate the Ontario Marriott for accounting purposes. Finally, as noted on our prior call, pending the conclusion of the Mass Mutual and Ontario deals, our secured debt restructuring program is now concluded. That said, we will continue to act in the best interest of our stockholders, so in the future we may seek to restructure additional secured loans if conditions warrant.

Next topic is our credit facility. Today we terminated our $85 million secured credit facility. We elected to terminate the credit facility because of the following. First, we have a very strong liquidity position, we finished the year with nearly $400 million of cash and cash equivalents, that includes restricted cash, which is more than 2 times all of our debt maturities over the next five years. Second, we hold significant unencumbered asset base. With the termination of the credit facility, and the pending release of three Mass Mutual hotels, we will have ten unencumbered hotels. Third, our business plan does not contemplate the use of revolving credit for at least the next several quarters, as other forms of capital are currently more attractive and less restrictive. And finally, the termination of the credit facility will eliminate approximately $600,000 in fees and associated costs per annum, and will further improve the Company's financial flexibility by eliminating restrictive corporate covenants and mortgage encumbrances on the five properties.

We will look to enter into a new and appropriately sized and structured credit facility at some time in the future, when we believe revolving credit will be additive to our business plan. We expect to accelerate approximately $1.6 million of noncash deferred financing fees associated with the facility during the first quarter. I would like to mention we are very appreciative of our various credit facility lenders, and we look forward to continuing to work with our key banking relationships on a wide variety of investment banking and capital markets transactions. As Sunstone continues to be very active in the capital markets, as in the past, we expect to award our advisory and capital markets deals to those banks that support us with deal flow and with their balance sheets.

The next topic is corporate covenants. With the elimination of our credit facility, our only remaining corporate level covenants are with our Series C perpetual preferred, and with our 4.6% exchangeable Senior Notes. As of December 31, 2009, we were in compliance with all covenants related to the Series C preferred stock and our Senior Notes. This is a very positive step. As you may recall on Q3, 2009, we did not meet the Series C leverage covenant. I should point out, that unless operations do improve, we may again fail one or both of the Series C financial covenants at some point during 2010. I should also point out, that if we were to fail the covenants for four consecutive quarters, a financial ratio violation would occur under the terms of the Series C, which would trigger a 50 basis point per quarter increase in the dividend rate on that security, as well as other control features, until such time as the Company were back into compliance with the Series C covenants. As we were in compliance with the Series C covenants as of the fourth quarter of 2009, the first point at which a financial ratio violation may occur, if at all, would be in the first quarter of 2011.

The next topic is impairments and other charges. And before moving on the to the detail of the Q4 impairments and other one-time charges, I do want to point out, that as we are now seeing market conditions stabilize and improve, while we can give no assurances, we do not expect to see meaningful impairment charges going forward. There were three noteworthy charges in the fourth quarter. First, as previously disclosed, in conjunction with our annual year-end impairment evaluation, we recorded an impairment loss of $88.2 million, in order to reduce the carrying value of six of the Mass Mutual portfolio hotels to their fair values, as of December 31, 2009. The six hotels, along with two others, are currently held for nonsale disposition, in advance of being deeded back to Mass Mutual in satisfaction of their associated debt. This is generally consistent with our prior disclosures related to this transaction.

Second, during the fourth quarter of 2009, our majority partner in our Doubletree Guest Suite Times Square joint venture recorded an impairment loss, in order to reduce the carrying value of the hotel to it's fair value. This impairment reduced the partners equity in the joint venture to a deficit. As the Company has no guaranteed obligations to fund any losses of the partnership, the Company's impairment loss was limited to it's remaining $26 million investment in this partnership. This impairment charge was taken against equity and net losses of unconsolidated joint ventures, effectively reducing the Company's investment in the partnership to zero, on it's balance sheet as of December 31, 2009. And the final charge, in December of 2009, the Company determined that a $5.6 million note received from the buyer of 13 hotels from the Company, in 2006, along with the related interest accrued on the note may be uncollectible. As such, the Company recorded an allowance for bad debt of $5.6 million, to reserve both the discounted note and the related interest receivable in full, as of December 31, 2009.

My last topic is corporate expense benchmarks and metrics. While we are not giving guidance on our expectations for 2010 revenues and profits, we would like to share with you some benchmarks for certain of our expenses. First of all, capital expenditures. During 2010, we expect to invest between $40 million and $60 million into renovations of our existing portfolio. The final renovation investment amount will depend on a couple of pending decisions, on the acceleration of certain projects. If the positive operating turns we are seeing in February continue, we may accelerate rooms renovations for our Chicago Embassy Suites, and our Renaissance DC, which would push our 2010 CapEx program to the higher end of the range I just gave you. $30 million to $40 million of our 2010 CapEx program will be routine, with the balance of capital expended being ROI driven.

Next metric is interest expense. We expect cash interest expense to be down significantly in 2010, to approximately $64 million. Corporate overhead, we expect cash corporate overhead to be approximately $16.5 million to $17 million in 2010. And finally, as we were active in the equity markets in 2009, our diluted share count for 2010 is expected to be $98 million. To finish up my comments, we have taken meaningful steps in our strategy to transform our Company into an appropriately capitalized world class portfolio of well located, high quality upper upscale hotel assets. 2009 was a challenging year, and we are very proud of our accomplishments. More importantly, we look forward to capitalizing on the impending recovery in 2010 and beyond from a position of strength.. Thank you. I will now turn the call back to Art to wrap up.

Thanks, Ken. Yes, and we are all looking forward to the next phase of the cycle, and how. As I mentioned, we are now seeing early signs of firming demand, even as ongoing dysfunction in the property level mortgage markets might lead to attractive acquisition opportunities. As a result, we believe we are moving into a phase of the cycle, where well capitalized proactive public companies, may have opportunities to create significant value through acquisitions. We believe the backgrounds and skill sets of the Sunstone team make us well qualified to capitalize on those emerging opportunities.

Let me reiterate, that we continue to run our business with a single focus. We exist to outperform. It has been our strategy to create long-term stockholder value by capitalized on cyclical opportunities and market inefficiencies. And as a result, we have made decisions which may have at the time appeared contrarian, but which have proven to be correct. In 2009, was a transformational year for Sunstone, and we have set the bar even higher for ourselves in 2010. Before I turn the call over to Q&A, I would like to share with you how we would like you to think about Sunstone in 2010, and beyond. That is first, our Company is poised for growth and outperformance from a position of strength. We have an exceptional high quality portfolio located in many of the top US markets, in addition to the growth potential already embedded in our existing portfolio. We have approximately $400 million of cash providing fuel for growth.

With the conclusion of our secured debt restructuring program, we can now focus more resources on acquisitions. I am very excited about the deals we are seeing, and I am optimistic about our ability to succeed in acquiring hotels, and overall Sunstone's prospects for 2010 and beyond. Two, we are comfortably leveraged to outperform. Over the past 18 months, debt has been a four letter word, probably rightly so, as we experienced a bottoming of the cycle, as we see recovery with our 5.6% average fixed rate debt, at an average term of over seven years, and no one is going to get those terms any time soon. Our equity is leveraged to provide outsized performance in the recovery, even before adding the growth of future acquisitions. With the results of our secured debt restructuring program, we can pay for 100% of our debt maturities for the next five years, with about half of our cash on hand. There is not many companies of any industry that can say that.

While the world continues to ring its hands over debt, our advantage is being comfortable with an appropriate amount of leverage, and therefore, willing to acquire hotels that may carry debt. Finally, it is our belief that he who wants it the most, and has the best talent wins. We have left the cycle where money was made in the hotel space by financial wizardry. We are now back in the space of back to basics, where high performing companies not only have hotels, and the best markets, but have the best quality talent, in particular at the hotel level, especially in sales. Now, history has shown the best time to acquire talent and take market share is when the market bottoms. While in the seminary I learned that the meek shall inherit the earth. Well, I believe in the current hotel cycle, the best and most agressive talent will outperform. This underscores our RFP process, and our Company culture. And with that, I would like to open up the call up to questions, so Josh, please go ahead.

(Operator Instructions).

Our first question comes from Jeffrey Donnelly with Wells-Fargo. Please go ahead.

Good afternoon, guys.

Hi, Jeff, good afternoon.

That was a great speech, Art, very motivating.

Buy.

Actually, I am curious, you talked about some of the markets and some that present challenges in 2010, how are you thinking about New York City, this year? There's a lot of supply growth in Manhattan that comes on the heels of a good chunk of supply growth last year. Do you think of New York City as one of the markets that could be a best performing this year, or do you think it maybe has higher risks that keeps it to the middle of the pack?

The former. While New York City is often treated as A market, the Times Square sub market historically has been the highest performer in terms of occupancy. And so, it feels like as New York City recovers, our Times Square markets are going to recover first, and we see that in occupancy. So while the overall market might not have robust numbers, we are fairly bullish, in particular,when you hear RevPAR numbers up over 14% year-over-year, in February. And listen half a month doesn't make a month nor a year. It certainly seems like that sub market within New York should be an outperformer.

And that's helpful. And then maybe a bit more broad, and I don't know if this is the best addressed to you or to Ken, but there's a lot of talk ton benefits of a mix shift, maybe driving rates this year. Can you hazard a guess on the percentage mix for your overall portfolio in 2009, between leisure, corporate and group, and where you think those percentages could move to in 2010?

I am going to dish it to Mark. Historically, we have been a 70% transient house, 30% group. I don't think that's going change much.

No.

Under 200 basis points, Mark?

What's going to happen is you going to be filling in, a lot of the transient these days, is still filling in with discount transient as expected. We do expect to see improvement in our group portfolio, but I don't think it will make a meaningful shift, because it takes a lot of percentage to change that. So, but, we should continue to see strengthening in group, and a lessening of the opaques, and a lessening of the discounts in transient segment.

And, Jeff, what I would add to that is what we are bullish on, is historical recoveries show that companies with a lower percentage of group, which might have been booked in the future at a lower rate, are going to have higher bait in the recovery, because you are filling up as markets kind of take the last rate available.

No, that makes sense. Maybe I should ask this a little bit differently. Within that transient category, because that's the focus is the thinking maybe if 2009 was full of airline crews and low rated online business, 2010 you are going to see a swing back to the higher price corporate traveler. Do you want to talk about split, leisure and corporate ,and what you can get to in 2010, or do you think that will that be fairly constant, too?

Pretty sure it will be constant. I don't have the number at my fingertips. Before the end of the call, I will come back to you with that.

And then, I guess my last question maybe is for Ken, I recognize you said you won't take questions, but on this, I am going to try I to ask one anyways.

For you, Jeff, we will take questions.

Thanks. The three hotels that you said were contemplating holding back from Mass Mutual, I guess, I think of that as in effect, you are sort of repurchasing them from Mass Mutual.

Yes.

Are you going to at least give us a rough indication of the magnitude of the payment you are contemplating. And I guess, maybe separate from Mass Mutual, because you didn't own and operate those last year, are you able to give us some indication of what those three hotels did in 2009 for EBITDA, and whether or not they will be cash flow positive in 2010?

Jeff, I wish I could. I would say, stay tuned. Things are moving well with Mass Mutual. So we expect to be in a position to report the final outcome of the transaction in the next month or so.

I will ask you one more then. I know you didn't give specific earnings guidance, but in some past quarters, you have commented on what you thought of about analysts consensus EBITDA and per share estimates. And -- do you have any thoughts on where consensus stands today?

Why don't we be consistent with our last couple of calls, and say we think that the analysts may prove to be overly optimistic this year, although we are very early in the process.

Okay. Thanks, guy.

Hey, Jeff. Before you jump off, back to the 70%, of that 70, 35 or about half is business traveler, and leisure is about 20, Government is about 5, and then contract and other are 10. And we would expect that to be the same, kind of 2009 to 2010.

Thank you.

Thank you, Jeff.

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

Good afternoon. Before I bring up the forbidden topic, I just thought it was appropriate to comment, Art, on the 8-K, about your comp. We don't see many CEOs, who earned bonuses refusing them. I think your shareholders are appreciative of that.

Thanks. Thanks, David.

And on the three assets that you are not going to talk about, I had also was think thing was essentially a repurchase, so I am glad Jeff brought that up. Can you talk a little about the accounting, and have you got all of the debt in the discontinued operations, or I guess in the non sale disposition line, or have you parsed that out as well?

Good question. The way we've accounted for the Mass Mutual portfolio is based on it's contractually allocated debt amounts. So you will see about $60 million of debt, that's on continuing debt related to the three assets, That is by no means, reflective of the release price for these assets. If you look at the last page of the press release, you will see the existing debt that is in place, net of all debt associated with the secured debt restructuring program. And that's the $1.145 billion total. Again if you look at the 10-K, you will see a total amount of basically $1.2 billion, again, that's inclusive of the allocated loan amounts for those three. Not the amount that we will, that we are negotiating to pay as a release price.

Okay. And then I guess, from a theoretical perspective, how do you look at acquiring three hotels for example, two in Rochester, one in LA, how would you look to value those three hotels? And is that negotiation or that analytical process any different because of the fact that you are negotiating with Mass Mutual? And , I guess, as part of that would you consider or would they consider leaving some debt in

Sure. David. This is Art. I can't speak and shouldn't speak for lender but our approach for valuating those assets are the same as if we were buying them. So look at what RevPAR growths were, flow through, and as Ken pointed out, synergy between those assets, would have to be considered.

And David, our plan would be to own those assets with no debt in place at this point.

Okay. So what I am hearing, if I am reading between the lines correctly, $60 million is the attributable to debt, you will have to pay that down, probably pay something in excess of that in order to carve those out of the agreement. Is that fair?

That is fair.

Okay. Next topic if I can, the note payable write off or net receivable write off, was that taken through the corporate overhead line.

Yes.

Okay. That explains that. And finally art you talked about the 50% save through, when you start seeing hotels having positive revenue gains, first question is how much revenue gain does there need to be, on a property by property basis, for you to start seeing EBITDA grow? And the second question is, once you are the in growth phase, what do you think the flow through will be from incremental revenue?

Sure. Historically, the first part of the question, 2% to 3% increase in RevPAR is generally where you see some growth, but then you look at our Renaissance DC that had a reduction in revenue, and an increase in EBITDA. Now, I can't say that's true for all hotels, but when you get the cost model right, you would assume that is possible for other hotels with flat or shrinking revenue could see some EBITDA growth. In terms of flow through going forward, I am going give you the popular answer, it depends, a lot of how much of that is rate, how much of that is occupancy. And if you assume kind of a 50/50, and so you would see flow throughs of 60%, thereabouts to 80%, to get it really, again it really depends on market by market, and what the mix did. But I wouldn't hold anybody to that number, because it really as we have seen, hotel by hotel, it varies a lot. And in particular, mix, if this year we see increases in occupancy, and declines in rate. It is going to be difficult to preserve margins.

Okay. So looking ahead in 2011, 2012, you think that as the mix changes to the equivalent rate, and occupancy thereabouts, it should be over 50% though.

One should expect that's the case. That's a reasonable expectation, certainly ours.

Great. Thank you.

Thanks, David.

Thank you. Our next question comes from the line of Chris Woronka with Deutsche Bank. Please do ahead.

Hey. Good afternoon, guys.

Hey, Chris.

A couple of questions, one is when we kind of drill down, and read through some of the regional data we get weekly and monthly, it looks as though the recoveries unfolding a little bit faster across the east coast, relative to the west. And you guys obviously have exposure both coasts, east and west. I am just kind of curious as to what some of the dynamics driving that are? And not that you have a lot of group houses, but do you think Las Vegas is impacting some of the other group markets?

To the last part of question, unsure. I have read, and we have heard a lot about kind of Vegas, and that it may keep rates down for a while going forward. We don't have anecdotal data from our hotels that they say listen we are losing group data, or group rooms particularly in DC and other locations where they're more locationaly driven. In terms of the market, it is really a function of convention calendar and supply. And so when I look at the west coast versus the east coast, New York is clearly having a good run up. And then there's anomalies like DC with the inauguration. You had two college bowls in the LA area in January. So you had some hotels really outperform there. I think it is early in the year where there's a lot of anomalies. And so, but I agree with you in one way. I do think we will come out of this where some markets are going to greatly outperform others, and there is only so much you can do about that.

Right, got you. And kind of shifting gears to the asset side, we have, it looks like we have picked up, in some situations banks are starting to actually get more aggressive in terms of pursuing action on these distressed assets. Is that your opinion as well, and what do you think, I heard your comment about maybe not seeing quite as many opportunities, as you initially thought. I mean, what's kind of the -- where is the middle ground, what are kind of the big sticking issues on why things aren't moving quicker than a lot of us might have thought.

Price and optimism. I would ask you to take a poll of yourself, how do you feel today versus October or November? And most people feel maybe though guarded, a little more optimistic. With that optimism, and I think many people, in the business community have already changed their RevPAR predictions for rest of the year, after just one month. So, if you take year one, and you increase RevPAR by a couple of hundred basis points and then flow that over four years, you are going to have a pretty significant increase in calculated price. So I think it is the optimism, that ebbs and flows, that then works in the calculated value that is really, really the difference.

Okay. Very good. Thanks.

Thank you. And our next question comes from the line of Bill Crowe with Raymond James. Please go ahead.

Hey good morning, guys. Good afternoon.

Hey, Bill. Good afternoon.

A couple of questions, your [conferian], I think you pointed that out in the call, is this a better time to sale than to buy?

Based on the number of buyers allegedly lining up there, we have asked ourselves the same question, if somebody was going to pay us significantly more than we thought an asset would be worth, we should consider it. So, that doesn't go unnoticed by us. We have not -- we are not actively selling asset, we respond to inbound calls. But I think you have caught on something, that might be true here and there for some companies.

Okay. And then I was interested in your comments about Chicago, that is correct you believe it is a very good long-term market. Isn't Chicago kind of on the precipice of potentially going through a secular change, where the environment for conventions has gotten so harsh or unattractive that they are losing a lot of conventions? So I am just trying to see what your longer term view is.

Yes, and when I worked there at Chicago Hilton in 1994, it was similar, Chicago has kind of gone through these cycles where the leverage of whether the buying or selling community feels a little more robust. And clearly the buying community now feels that they can push around some cities, and maybe rightfully so. And San Francisco has a bit of this as well ,because it is an expensive city to operate in. And Chicago is at kind of the tipping point. where there's a lot of shows, RS&A and NRA, the restaurant shows, some others, toy show that have been there forever, that are out bidding out in other cities. The question is, are they doing that just to get the best deal, or are they really intent on moving? So if some of those major shows pulled out of October, and some of those go around th Thanksgiving period, Chicago the city, would never be able fill those. And if you are figuring you are going to lose 10, 10 to 15 nights that were otherwise 100% occupancy, you could say, that Chicago has forever lost about 3% in occupancy city wide or thereabouts. So I would say, there is that potential, but Chicago and other markets have been there before. And I think Chicago is the sort of market that realize that, and is probably marshalling all of their resources on both side of the aisle, to find a way to make things work.

Great. Thanks. That's it for me.

Thank you.

Thank you. And our next question comes from the line of David Katz with Oppenheimer. Please go ahead.

Hi. Afternoon, all.

Hey, David, good afternoon.

Hey. I just, in the commentary there was the notion that competition for portfolios is somewhat less, than either for debt, or I guess individual properties. Can you elaborate on that just a little bit as to why, why that is, why you are seeing that?

Yes, two reasons. People are risk adverse, so they want to take on transactions that are smaller in scale. You look at the size and funds and the cash available, no one is going to use all of that on one deal. And so those are really, the two drivers as to why people are looking smaller. We just left an environment where 2005, 2006 and 2007 people said if it's not to be commas, I am not going look at it and they learned the dangers of that. And the last reason is larger deal, probably by definition, have a lot of debt. And debt, people have a great aversion to. Particularly if there's maturities two years out, how does one reserve sufficient cash for a deal with maturities two years out So if you hold all of that cash today, it certainly is a drag on the IIR. So I think those are the three reasons, that really we notice make less competition.

And one more if I may, there is the $5.6 million note, and have you told us who that is with?

No, we haven't.

Okay. And I -- I assume that's intentional, not discloseable?

That's correct, David.

Okay. I think everyone is pretty much covered all the different angles on Mass Mutual. So thank you very much.

David, before you go away.

Sure.

I take that back. In a release, in 2006, we did reveal who that was with. And it was with Trinity Hotel Investors.

Thank you very much.

Thanks.

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

Good afternoon, guys.

Hey ,Michael, good afternoon.

Real quickly on the line of credit that you guys terminated there, how close were you in proximity to the covenants on that? It sounds like you are freeing up substantial capacity, just wondering how much capacity and how close you were there?

Yes, Mike. Again, good question. This is Ken, we do expect that during the course of 2010, we would have bumped up against one or more of the covenants that were contained in the facility. And there was a one-time fixed charge coverage ratio limit that was probably -- t we were going to see the Company bumping into that at some point.

Okay, that's helpful. And then the press release, you provide a good amount of detail on the portfolio, absent the Mass Mutual. Just curious as to what the margins actually would look like if you go back, and exclude that from the portfolio.

We have a pro forma analysis that shows the EBITDA for the portfolio, and this in the back of the press release:

Okay. I will check on that.

Look at age 11 -- you should have the full analysis.

Okay. That's helpful. Then switching to the Doubletree there, with the impairment during the quarter, is that hotel still compliant with it's debt covenants then, and also when is the debt maturity on that.

And so the hotel has about $300 million worth of secured debt in place. It is in the cash sweep, so the partnership is not taking money out. So there are no covenants beyond that. It is a sweeping loan. The debt matures in 2012.

Okay. Then just a final question, it sounds like you guys are pretty much done with the repositioning of the balance sheet, you seem to have a pretty good handle on where operations are? Why not provide guidance at this point, what's the additional things that could add volatility?

Sure, Michael, our belief is that we should provide guidance when we get numbers we can rely on. In December, we sat around and had our 2010 budget presentations, and the vast majority of hotels, all but one beat their budgets for January. So we continue to see where, we aren't getting numbers we can rely on. And when we get numbers we can rely on, we're going to do that, and I think the variance to budget, might have been -- it was double digit, it was like 15%. It doesn't give you purpose to give you numbers, and a month later say, the view has changed. And here is my anecdotal comment to this. A year and a half ago as things started to drop off, and Ken is the first one to notice this. People were overly optimistic, and operations were well below expectations. Now that we've had over a year run down, people are more pessimist and they're projecting off a tangent, and so they're still somewhat pessimistic in their view, while the operations get better. Our job as owners, is to push them from a revenue standpoint, to say, listen, we think it is going to be better, start to yield toward higher, higher occupancy, and higher rates. So when we get numbers we can rely on, and are accurate, we will share those.

Okay. Thanks guys.

Thank you.

Thank you. And our next question comes from the line of Bryan Maher with Collin Stewart. Please go ahead.

Hey, good afternoon guys.

Hey, Bryan, good afternoon.

Just one housekeeping item, and the a followup on the Doubletree, the credit facility, what was the breakage cost on that, Ken?

We were expensing out $1.6 million , those are deferred financing charges though, costs with associated with the initiation. There is really no cost to terminate the

And then on the Double tree and I don't want to beat a dead horse, but can you tell us what the new valuation according to the partner there?

No, we cannot.

Okay. Can you tell us what the initial investment by Sunstone in the property was?

Yes, we made a $40 million investment in the deal. Our investment as of today, prior to the writedown was $26 million. So we took, that's after money we have taken out.

And when was the 40 million made? Can you tell me.

2006.

Okay. And then just lastly, is there any chance you guys could lose the hotel, like just be taken away?

Well, the Doubletree Time Square?

Yes.

As we noted, we have written our investment to zero in the partnership.

Right. But you would have further upside if everything improves. So there's upside there, but no real down side, but I just wanted to see if there potential upside, but if you lose the hotel, there is no upside.

You can take the fact we have written it down to zero, to mean there is a chance the hotel would go away. For our purposes, it has gone away. I think you can also take there's a potential that as you just said, this hotel could revalue, and you can see a nice recovery in the New York market and it could be valued out.

Thanks a lot.

Thanks.

Thank you. And our next question comes from the line of Ryan Meliker with Morgan Stanley. Please go ahead.

Afternoon, guys.

Good afternoon.

Just a quick question for you, getting back to the market mix, can you guys give us any color on the percentage of your group demand, what you are expecting, for 2010 that's currently on the books and that rate relative to 2009.

In terms of what the pace is?

So like I mean, do you have 70% of your group demand on the books right now, of what you are looking for 2010? And is that rate at the same level as 2009 group rate or are we looking.

Right now for group, pace is down 18%, with a 14% reduction in occupied rooms, and a 4% reduction in rate. But what we need to caution you with, is that the rooms that were on the book, we are comping against for last year, were what we would characterize as much softer. We saw a great deal of attrition against the rooms that were on the books last year as the market continue today be soft, our meetings just didn't materialize, the way they were booked. And this year, we think the quality of the bookings, is considerably better.

And I would add to that, generally we turn the year with over half the year with business on the books. When we turned year, we were at a similar place but as we pointed out on the call, the activity was 30% higher this previous January. So it seems like the amount of bookings are increasing, and how that is going to play out is to be seen.

That's helpful. Along those lines, maybe I am wrong, but if I am, please correct me. We are in a deteriorating rate environment, and the groups that would be occurring now, would probably be coming in at rates lower than the ones that were booked the past year or two. If that's correct, looking at January was a very strong month for group bookings for you guys, what -- how much of a discount did January bookings get versus what you have on the books right now?

That varies greatly a lot by time as well, 4% overall is where the discount terms are rate.

Right. Thank you very much.

Thank you.

Thank you. And we have a follow up question from the line of David Loeb with Robert W. Baird. Please go ahead.

I think I mostly answered it. In that original release, on the Time Square asset, you had mentioned a 28.5% mezzanine loan that was part of the initial $68.5 million investment. Was that also either paid off or refi'd out or refi'd into different debt.

Actually, we sold that for a profit shortly after we closed the deal.

Okay. So the net investment was just the $40 million preferred equity investment. And you pulled some cash out of that as well.

Yes.

Okay, great, thanks.

Thanks, David.

Thank you. And management, I am showing no further questions in the queue. Please continue.

Sure. We appreciate everybody's time today, as well as your continued interest. It is about 105 people logged in today. We look forward to speaking with you at our mid quarter update call in April, and the variety of conferences that you may be attending the next month. So thank you again for your support of Sunstone. Thank you.

And ladies and gentlemen, this concludes the Sunstone Hotel Investors fourth quarter 2009 earnings call. You may now disconnect and thank you for your participation.