Sunstone Hotel Investors Inc (SHO) 2010 Q2 法說會逐字稿

Good morning ladies and gentlemen. Welcome to the Sunstone Hotel Investors Q2 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, Friday August 6th. I would like to turn the conference over the Mr. Bryan Giglia, Senior Vice President of Corporate Finance and Sunstone Hotel Investors.

Thank you, Alicia. Good morning everyone. Thank you for joining us today. By now you should have received a copy of the earnings release, which was released this morning. If you do not have a copy, you can access it on the investor relations section of our web site at www.sunstonehotels.com.

Before we begin this conference, I would like to remind everyone this call contains forward-looking statements that are subject to risks and uncertainties including those described in our prospectus', 10Qs, 10Ks and other filings with the SEC, which could cause results to differ materially from those projected. We caution you to consider those factors in evaluating our forward-looking statements. We also note that this call may contain non-GAAP financial information including EBITDA, adjusted EBITDA, FFO, adjusted FFO and hotel EBITDA 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. I would like to turn the call now over to Art. Art please go ahead.

Bryan, thanks and good morning everyone, thanks for joining us today. During today's call we will provide you with a detailed review of the second quarter results as well as emerging demand and operating trends. Finally, Ken is going to provide additional detail on the balance sheet.

Starting with current operations update. Again, all the figures I will discuss today are pro forma for 30 Hotel portfolio including Renaissance West Chester on a pro forma basis. Pro forma adjusted EBITDA for the second quarter was $39.9 million in adjusted FFO per share was $0.18. Again, this number is pro forma, as if we owned West Chester for the entire quarter. Please refer to our earnings release for reconciliation of pro forma adjusted EBITDA and adjusted FFO and FFO per share to net income, which are both above street consensus.

The second quarter, our total portfolio RevPAR pro forma for our 30 hotel portfolio was up 6.8% to prior year. Occupancy increased 3.4 points and rate was up 1.8%. Year-to-date RevPAR is up fraction of a percent above last year. We continue to see strength from our Gateway market Hotels; Hilton Time Square, Marriott Boston Long Warf, Renaissance Baltimore, all turned in double digit RevPAR growth in the Q2.

In terms of regional performance, our California properties up 2.3%, in Rev Par, LA Orange county area hotels were down a fraction when compared to 2009, while our three San Diego area hotels, Embassy Suites in La Jolla, Delmar Hilton, Delmar Marriott were up 9.5%, 2009 second quarter. Our other west region was up approximately 1% compared to last year. The Hilton Houston and the Portland Marriott were able to show significant RevPAR growth with 6.9% and 7.1% respectively. We continue to see the Eugene Valley River End and Park City Marriott struggle with RevPAR growth. Midwest region was up 6.2%, to last year, Minneapolis and Chicago both posted double digit RevPAR growth for the quarter.

Finally, our east region was up 9.9% for the second quarter, DC up about the same amount. New York City, Boston continue to outperform with RevPAR gains of 14.6% and 12.4% respectively. New York City and Boston continue to be leading indicator markets Hilton Time Square generated 47 sellout nights during the second quarter, compared to 18 sellout nights during last year. Additionally during the Q2, our Hilton time square realized on 78 out of 91 days in Q2, a higher average rate than the same day in 2009.

Like New York, Boston also continues to demonstrate an impressive recovery over 2009. Our Marriott Boston Long Wharf had 46 sell outs in Q2 2010 compared to 15 same quarter 2009. We realized 54 nights with higher average rate in Q2, than the same day in 2009. DC area hotels performing admirably as well, and Renaissance DC and Marriott Tyson's Corner have RevPAR growth of 8.3% and 15.4% respectively contributed to increases in both ADR and occupancy.

Our asset management team and operating partners achieved great margins in light of growing occupancy, without meaningful rate growth. Hotel operating margins up 70 basis points for the quarter, RevPAR increased again 6.8%. Q2 margin performance negatively impacted by attrition revenue of $1.5 million booked during Q2 2009, compared to $300,000, booked in Q2, 2010. Adjusting for the attrition income, margins would have been up 120 basis points in Q2.

Let me talk about improving business trend and business mix. As highlighted by gateway markets, our portfolio wide sellout nights in the second quarter showed a meaningful improvement over 2009, and in several cases our sellout nights approaching levels seen during the peak demand periods in 2007. Portfolio wide, during the second quarter, we had 318 sellout nights as compared to 247 in 2009, and 407 in 2007. July's results provide further evidence that we have entered the early stages of what we expect to be in extended cyclical lodging recovery. July RevPAR for portfolio finished up 4.4%, to last year and up to our prior internal forecast, 16 of 30 properties occupancy increases in July and 25 of our hotels recorded higher rates.

Overall our outlook remainder of the year is very positive as operators continue to perform better than the forecast just submitted 30 days prior. That said, we do expect to see some pockets of weakness as the recovery takes hold. For example, as we previously noted, we expect our two Houston hotels to lag the broader US lodging recovery for the balance of 2010 due to reduction in certain government contract business and new supply in that sub market. While we expected softness in Chicago during 2010, due to continued weak city wide calendar, we saw considerable strength in the second quarter with a 12.9% RevPAR gain and now expect our Embassy Suites to be slightly up for the full year in 2010.

Our group booking pace continues to show significant improvement each month. Current group pace is down just 5.2%, same time last area, and that's a significance improvement to our pace at the turn of the year which was about 18%. Actual group room nights booked at our hotels during June was 17% higher than through June 2009. At our largest group houses DC Renaissance, Orlando, Baltimore the average rates on rooms being booked in 2011, are approximately 13%. Let me say that again, largest group boxes; DC, Orlando, Baltimore our average rates for group rooms booked are up approximately 13%.

I would like to take a minute to drill down on the operations and asset management activities. We've implemented recently as the margins noted, they just don't happen on their own. So for example in driving rate, we are continuing to selectively drive rate where ever possible as a key asset management initiative. At our Embassy Suites, La Jolla we worked with a manager to implement aggressive price strategies during July based on positive demand trends that we are seeing. For example, during Comic-Con, a major San Diego convention, we assumed we would have compression out in Delmar, La Jolla markets but we asked operator to aggressively increase rates early and maintain the rate position even while others did not. That paid off significantly. When our hotel on running 28 day star ended July, grew overall 7.2% year-over-year, while comp sets rate grew anemic 0.5%.

As I mentioned in the quarter update call, we also had rate gains in Time Square, Boston and Baltimore. Time Square showing double digit ADR growth. Tyson's Corner, another market where we avoided offering early discounts and drove 15% RevPAR increases comprised of 4% rate and 11% from occupancy increases. Even in softer markets like New Port Beach, we were able to build occupancy through managing booking channels and customer mix. While growth in RevPAR is important, you don't put RevPAR in the bank that's why you might give up RevPAR at some hotels as a results from occupancy lost and rate gained.

Further, in terms of preserving efficiencies while Q2 occupancy was up 3.4 points productivity initiatives have reduced total hotel hours. For example, in our Marriott managed portfolio total hotel hours are down 4% year-to-date. Total portfolio hotel profit flow through, for the quarter was greater than 50% while our Marriott managed property was impressive greater than 60%.

In terms of other initiatives, we talked about a bit in the past, energy efficiency we have been aggressive in going after projectssuch as building retro commissioning, kitchen exhaust control, variable speed drives that operate based on demand or need and hot water boiler controls. For example, Marriott Long Wharf, which is one of our first installations of kitchen exhaust fans and variable speed drives is showing utility expenses down 27%, year-to-date. Renaissance Long Beach, where we invested $200,000 in a full retro fit, is showing almost 36%, year-to-date reduction year-over-year. And also, we've been upgrading parking. We're evaluating and updating dated parking systems to state of the art systems allowing maximizing of revenue by I reducing leakage and increasing garage productivity. For example, Renaissance Orlando, where we recently upgraded the system, we have seen a 60% increase in profit.

Looking ahead, as you know much of 2010 group business was booked during 2009 and 2008 at a time where business sentiment was at extreme lows. So, it comes as no surprise while transient business trends are rebounding nicely, group trends still largely reflect the negative business sentiment that exists when the rooms were booked. That said, our hotels have been busy booking group business in the year for 2010 and as a result compared to the same time in 2009, group pace for 2010 is now down roughly 5.2%, that pace trend represent as 2.1% decline in OCC and 3.2% decline in rate.

As is typical during cyclical inflection points, while RevPAR trend on portfolio wide basis is positive we are seeing a fair amount variance from market and market and quarter to quarter. We have some hotels that have seen year to date double digit or higher rev or high single digit RevPAR growth like New York, Boston, Baltimore, Minneapolis and others, DC and Baltimore had excellent second quarter results but will have tough comps so they are probably not going to beat in the third quarter. Examples of markets that are headed in the right direction but the year-over-year comparison will remain choppy. While I would be surprised if our year-over-year RevPAR growth increases every month, I do expect it to be positive for sometime to come. With that, I would like to turn the call over to Ken to review the balance sheet. Ken, please go ahead.

Thanks a lot, Art. Thanks to everyone on the call for joining us. I will be very brief today. As Art noted, the Q2 financial results we announced this morning are at the high end of the ranges we gave in our July interquarter update. Our results reflect the continued positive momentum in our business trends and demonstrate the strength of our business model. Specifically, our aggressive asset management, disciplined approach to investing, and proactive balance sheet management have led to lower capital costs, better credit metrics, an improved risk profile, and the solid operating performance we announced today.

With respect to our balance sheet, we ended the quarter in an exceptional liquidity position, with approximately $275 million of cash, and cash equivalence, including restricted cash. Our debt maturities schedule is also a strength. Over the 2010, 2011 time frame we have just one loan maturity, $81 million mortgage secured by our Time Square Hilton. As previously announced, we intend to refinance this mortgage in the fourth quarter and we already received strong unsolicited lender interest. Beyond the Hilton Time Square, we have just $100 million of debt maturing through March of 2015 and a very well staggered debt maturity schedule thereafter.

As the extreme economic and credit turmoil of 2009 has materially abated, we are looking to tighten our capital structure by deploying excess liquidity in to growth opportunities. With that in mind and with our 11 high quality unencumbered hotels, strengthening operations, limited debt maturities and improving credit metrics, we believe now is the appropriate time to implement a new corporate credit facility, which is on our to-do list later this fall.

As we step back from the details of our quarterly results and we think generally about the next several years, we can't help but be very optimistic about the future. The defensive tactics we employed over the last year have enabled us to keep our eyes forward and focused on growth, and value creation. In short, we believe our portfolio of high quality, urban upper upscale assets coupled with appropriately levered balance sheet and our disciplined approach to all facets of business plan, translate into a compelling value proposition. And with that, I'd like to thank you for your time today and turn the call back to Art to wrap up.

Thanks. We all know we end the calls by telling you we continue to run our business as a single focus we exist to outperform and I think as Ken rightly highlighted, the Company certainly well positioned to do that I am optimistic about the hotel industry at large and particularly the properties for Sunstone and its stockholders. And with that, I would like to open up the call to questions. Operator, please go ahead.

Thank you, sir. (Operator Instructions). Our first question is from the line of Patrick Scholes with FBR Capital Markets. Please go ahead.

Good morning. Good afternoon. Two questions here. The first I'm wondering if, there was an article last night blurb that came out on the Wall Street Journal online about the potential for the Manchester Grand Hyatt Hotel in San Diego being sold to you. I'm wondering if can you provide color, detailed commentary on that? And then, my second question is I'd like to get your views on expectations for real estate taxes over the next one to two years. Thank you.

Sure, Patrick, this is Art. It's been and it's going to continue to be our policy to inform the market of material transactions either at the time of hard contract signed or where the deal is closed. First question, don't have a comment. To your second question about real estate taxes, kind of like RevPAR it's market by market, street corner by street corner, while real estates values have gone down, in some cases, the rates have gone up. And I think real estate taxes in general should decline but it's going to probably take time to work through the appeal process. It isn't a sort of thing that happens at the turn of a dime and it might take a while before we see that expense line moderate.

Great. Thank you.

Thank you.

The next question is from the line of Smedes Rose with Keefe, Bruyette and Woods. Please go ahead.

Hi. Smedes. Art did you say RevPAR in July was up 4.4% for your portfolio?

That's correct.

I guess I'm wondering, because nation wide upper upscale looks like its coming in at more like 7% to 9%. Is it all just, you mentioned, Houston was particularly weak and wondering it seems like kind of underperformance relative to the overall chain scale.

Yes, Smedes. Good question. What I highlighted on the call was we are seeing some choppy quarter by quarter, month by month results depending on comps for some hotels and I had noted for example, DC had a huge quarter, last year had a huge quarter. May not even beat year-over-year comps for a quarter. A lot to do with market concentration and comps.

Okay. Then on your last call, you mentioned that you guys would provide the full year 2007 EBITDA number for the Renaissance West Chester and wondering, I didn't see it in your release, do you have that?

Give me a moment to dig that up because I think you had asked for that. Is there another question I can answer for you in the meantime?

The last think, looking at, Ken, have you guys now come completed the acquisition from Mass Mutual?

Yes, Smedes. We completed the release of the three hotels earlier in the year from Mass Mutual, there are eight hotels that remain subject to debt restructuring program, we hope to announce the deed back of those assets later on this year, and then reflecting back on your question about West Chester on the last call we did indicate peak EBITDA was $6 million for that hotel.

$6 million, okay. Okay, thank you.

Thanks, Smedes.

Next question is from the line of Josh Attie with Citigroup.

Thanks it's Josh and Michael Billerman. I thought maybe you could provide more detail to follow up on Smedes' question, help us understand why the portfolio is underperforming the industry, maybe which markets in particular, because I think DC running up 11% quarter to date so the market hasn't been underperforming.

Sure. Glad to do that. It really is specific markets, DC as a market is up but our hotel, third quarter last year, had a huge quarter, even much better than the market outperformed it's not going to do that again. With the big group boxes, you will see that. Similarly, Long Beach is another market. As well as Orlando. So when you look at our big group boxes third quarter 2009, they really had, as the market was starting to turn, had some pretty good months that or quarters that are not replicated in the third quarter. It's not an indication we think those are tough markets or heading in the wrong direction. It's again choppiness or noise in the quarter by quarter statistics.

Do those comparisons and those hotels normalize in the fourth quarter?

They would be -- if they're negative or low in the third quarter, they are certainly a lot better in the fourth quarter.

It sounded like when you were talking about deceleration of RevPAR against difficult comparisons in general in the back half of the year. I think on prior calls you spoken about possibility of the double digit RevPAR growth in 2011, has your thinking on that number changed?

No it hasn't. A lot of 2010 is already been put in the has already been baked. We can't move corporate negotiated rates, group business is already on the books as I noted for example on our bigger boxes 2011 our booking group rates in 2011 that are double digit so you're right, while there is going to be choppiness and noise in the fourth quarter of 2010 because you can't do much to change it, 2011 and listen none of us really know where corporate negotiated rates are going to end up as part of your question but clearly should be higher and we continue to be see shift in mix, double digit RevPAR growth in 2011 certainly for certain markets in something that shouldn't be off the table for anybody.

Just to be clear on how this year is going to progress it seems like for the third quarter, you will underperform the industry because of the difficult comparisons, but you feel like in the fourth quarter, you will perform in line with the industry that those comparisons aren't an issue?

I can't tell you how the industry is going to perform in the third quarter or fourth quarter or how we are but I can tell you that the third quarter year-over-year is unlikely to be as good as this quarter. And the fourth quarter is likely to be better than the third quarter.

Okay.

Is that helpful?

Yes, that is helpful. Just one more question, could you remind us where you stand on the convertible preferred covenant and the leverage?

This quarter we were just fine on all tests. So as we talked about in the past with the Series C convertible preferred, which is $100 million security, there are covenants, financial covenants, in order to trip what is called a "financial ratio violation" we need to fail those covenants four consecutive quarters we have not failed the covenants at all and our expectation is we will not fail the covenants going forward.

Okay, thanks very much.

Thanks, Josh.

Next question is from the line of Bill Crow with Raymond James.

Good morning, guys.

Hey, Bill.

Morning, Bill.

Couple of questions. First of all, Ken, maybe for you, could you talk about attrition and cancellation fees going forward and how that might impact your margins in the third and fourth quarter?

Sure in Art's comments he noted that the margins for the second quarter were impaired by the year-over-year comparison in attrition fees. Going forward we would expect attrition fees would normalize back out again in 2009 given the turbulence on the economy, attrition fees were spiking. And going forward you will see a trend that's more like what we saw in the second quarter.

I'm sorry. So third quarter, it shouldn't be as much as an issue for margins or should continue to be?

Third quarter, we expect that's going to compare relatively similarly to the third quarter of 2009. The second quarter was the real anomaly.

Okay, second quarter was the big issue. Art, I'm going to ask a question on the Manchester, understanding that you're not going to comment on whether you are involved or not, that's an asset on the market for sometime. Do you know based on your history of involvement in the industry whether that asset has assumable debt affiliated with it.?

Yes. I can't tell you from public records whether that's something that I know. Sorry.

Okay. All right, that's it, thanks.

Thanks.

Next question is from the line of David Loeb with Robert W. Baird.

Hi, guys.

Hi David.

I appreciate Patrick paving the way and getting you to say no comment and Bill giving you a little further down that road. I want to ask you, I'm only going to ask one question, but it's got about fifteen parts. So apologies for that. I'm interested generally in how you see the acquisition environment? What kind of targets you are looking at for acquisitions and more specifically about markets for example, a market like San Diego, where you used to have four hotels in and around San Diego, that you no longer have and you have presence in La Jolla, what is your thought about that market? Further to that what do you think about using OP units to finance future acquisitions?

Sure, David, thanks. That was only a four part question, far less difficult.

I have follow up, don't worry.

Glad to hear it. Acquisition market, again, remains crowded, we are very active I think we wrote letters of intent of a couple of billion dollars in the second quarter in terms of deals that we looked at and pursued, no results to show for that.

In terms of what we are targeting again, like many others, we are looking at upper upscale assets in major markets. We are looking at doing larger deals as well, looking portfolio deals we continue to look at bad debt. And in general, on a solving four when you get to 10 cash on cash, is that year four or five or six is a general underwriting guideline that you first look for.

In terms of markets, what we see is when everyone perceives a market is a place to be, prices really get bid up. DC for example, the new Versailles, everyone wants to buy something there, be it public storage, retail, you name it. So the prices really get expanded, cap rates really get compressed, opportunity creates value is greatly reduced. We try to identify markets or sub markets that have changed. I think some of our peers for example, Minneapolis was the worst market I think in the US last year in terms of RevPAR growth. Now it's going to be of the best though I doubt that's going to persist in the long run. You pointed out San Diego is a great test case of market where there is new supply that comes to market one has to look at how the market dynamics change going forward if you have a certain property type, say boutique, let's say a lot of boutique hotels move in, how do you compare with the newer quality.

If the center of a market moves in a certain direction, geographically, where do you sit? And in San Diego in particular with addition of new rooms those outside the compression zone for the standard size groups are having to book airline crews and very well may have to for sometime. So that is a market, like some other markets where your location within that market greatly impacts the results of that hotel.

Does that mean in San Diego that the Water Front Convention Center hotels for example, are an attractive market, given that they are getting used to the addition of a third giant hotel there?

Can't tell you if I know for sure that but what we seen from the hotels we owned in the past if you are closer to the water, you tend to perform better than if you are closer to the five.

Units?

Yes. Certainly like Ken, do you want to comment on that, something we commented on previous calls and we would be open to.

Sure. I wouldn't add anything other than a REIT we have distinct advantages in the form of consideration we can offer, on deals and we tend to we intend to use these advantages going forward.

Art, on the cash how quickly you get to cash on cash, of ten, what is your goal there what is your hurdle on that, how does that translate in to other metrics typically?

Well the goal is ten cash on cash.

But over what period of time?

Four to six years.

Within six years?

Yes.

Okay. How does that generally look on a EBITDA multiple over cap rate basis today or first year around?

Depending a lot if you look at hotel with zero cash flow it's going straight up and there haven't been a lot of hotels with cap rates north of 7.5 so the rate of growth has to be fairly material, and what we look for is not that we are hoping the economy is going to get that much better but the properties underperforming the market that with enhancements or changes can get some material improvement from that as opposed to hoping for significant GDP growth to support it.

That makes sense, thank you.

Thanks again.

Thanks David.

Next question is from the line of Joe Greff with JPMorgan. Please go ahead.

Hey everyone. Most of my questions have been asked and answered. Though I have a question on 2011, corporate negotiations I know it's quite early but what are your expectations for corporate rates and another question on the corporate rates, what percentage of your room nights this year, on a pro forma basis, relate to bookings associated with a corporate rate and on a similarly pro forma basis where was that in 2007, 2008? Thank you.

I think to the last question there was a mixed shift more in to leisure, out of corporate negotiated of about 300 basis point to 400 basis points. In terms of your first question, most of our managers are going to begin 2011 negotiations shortly. Our expectations that rates are going to go up especially for markets running 80% consistently like New York and Boston, and not only is it going to be real rate growth but there is also going to be mix in shift, as well. Ken, did you want to add something to the exact number I kinds of given a range on the corporate negotiated how much it changed from 2007.

Total business transient which includes the corporate negotiated demand was up 17% in the second quarter. Definitely seeing a shift in that segment of business more quickly than our other segments.

Good enough, thanks, guys.

Thank you.

Next question is from the line of Michael Salinsky with Royal Bank of Canada. Please go ahead.

Good morning. First question, you guys talked a little bit about the Mass Mutual portfolio and time line and gave update on the W, curious you stand with the Marriott Ontario in terms of plans to deed that back.

Ken?

Marriott Ontario has been deconsolidated from our portfolio for several quarters now and it is in receivership. Our understanding is there are they got interest if in that hotel from third party acquirer, we are working with the special servicer and the receiver to help that process along, at this point it remains in a receivership.

Okay. Second of all, as you look to new transaction markets at this point, just curious whether you're comfortable taking on additional debt financing. Current cash flow levels or preference would be to finance most transactions still on a all cash all equity basis. And lock in leverage later on in the cycle.

Great question, as we indicated in our comments today and previous calls we pride ourselves on remaining appropriately leveraged. We think that we are at the front end of a cyclical recovery and we want to be very careful, as Art said before and I said before, to watch against over "equitizing" if that's really a word we are very comfortable with introducing level into the mix as we move forward. We want to do it in a disciplined and measured way but not looking to employ a pure equity funded model going forward.

With the Time Square being unique example are you seeing debt terms in the market currently that are acceptable to locking in leverage?

Yes.

On current cash flows.

Another very good question. A year ago a lot of our comments revolved around dysfunction within the secured debt market, especially as they applied to lodging assets. Those markets have recovered markedly and in fact functioning quite well. Unsolicited indications as to what we could do on Hilton Time Square, which are very attractive. Spreads are certainly wider than they were at the peak of the last cycle when we all believed risk was mispriced but they are attractive by historical levels and it's going to come down to the asset, the location the growth profile of the asset but debt is available, secured debt is available, and we are looking forward to continuing to use that as the fundament of our leverage within our portfolio going forward Which is I recognize a big change from our comments in the past.

That's encouraging, the final question, you talked a little bit about a new line I'm just curious as to as you start discussions with the lenders on that, is it are you thinking unsecured versus secured, where kind of where are you thinking at in terms of terms or size anything you can provide would be greatly appreciated.

Sure, absolutely and as I mentioned this is a fall to do for us. We would think the appropriate size for our Company at this point is somewhere between $150 million and $250 million. We would look to have unsecured facility. Covenant packages are a little bit different from what they were back at the once again at the peak of the last cycle. But we can assure you it will be a better more flexible covenant package than what we locked in a year ago when we dropped in a temporary credit facility.

That's it for me, thanks.

Next question is from the line of Chris Woronka with Deutsche Bank. Please go ahead.

Good morning, guys.

Hey, Chris, good morning.

If you look at your portfolio, is it possible for you guys to kind of estimate what percentage of your guests are flying in and your general thoughts on air lift and does that impact 2011 at all I mean kind of what I'm getting at is how many people that have signed up reservations with you have booked their flight and I suspect it's the low number and do you guys view that as an issue or such a small number you don't think about it much?

I think PKF or HVS had done a pretty intensive study that showed a very high correlation between airline deployments and hotel occupancy. In fact they come up with 0.6 or 0.4 occupied rooms, so very high correlation. As Ken noted, the big mix shift to business traveler, a lot of that has happened in the month for the month in the week for the week. So, Sunstone a 70% transient company, and a lot of that business being book short-term, yet difficult to say there is nobody, there is very rarely are people booking business trips two or three weeks out with airline pricing change with Saturday night stays or two week discounts being less important to the traveler it's happening more short-term for that traveler. So yes, I don't look at that stat as much now.

Okay. Great, then on the as we kind of think about I guess total RevPAR, for you guys going forward and how that impacts margin, I assume as you are getting more transients and groups back you are getting more outer room spend and more banqueting, I know that the outlet revenues are worth a little less than the banquets are worth a little more, how is that mixing up should we think about impacts on margins being net positive or is it more at the outlet side where the impact would be negligible or something like that.

While RevPAR is positive in a lot of hotels, food and beverage revenue is behind. That has much to do with banquets as opposed to outlets. Reduction of outlet revenue, most hotels don't make money in the restaurants, so a reduction there as long as one can offset in costs should be a mathematical positive. Banqueting at larger hotels run pretty significant margins, but still at below rooms, so you are right. As your percentage of revenue shifts towards rooms, you should see some margin increase just from that.

Okay, great thanks guys.

Thanks, Chris.

The next question is from the line of Jeffrey Donnelly with Wells Fargo. Please go ahead.

Good morning, guys. Just one question, not necessarily specific for Sunstone, Art, but how are you thinking about the prospects for I guess I'll call it entity level transactions in the hotel industry? Most hotel CEOs have maintained a fairly optimistic view this quarter, debt markets coming back, CMBS deals are starting to get done, and we've seen more IPO candidates than we've had successful IPOs, which makes me wonder, do you think we'll see more large transactions say in 2011, either public to public or public and private?

Yes, Jeffrey, good question. There's always kind of the catalyst for that, lowering G&A expenses, having a larger portfolio being able to take on more transactions and so certainly, we look at it as our peers do as well, if there is a way to outperform, and if M&A is part of that that's something one has to look at. Whether that translates in to more blind pools or people coming to market, I can't tell you I have a pulse on that, but I would expect if growth was slower than people expect there would be more focus on M&A, if growth is a lot higher same store growth is going to make things tougher to price and deals won't get done. I think it will have a lot to do with expectation of growth rates.

I know it's a loaded question but anything out there that's interested you guys or not so much?

There a lot of things that interest us. We have been very active in trying to put deals together. As I like to say, I don't enjoy about talking about things I try to do I'd rather tell you about things I have done. And to date don't have anything to tell you about. We remain very active and curious and look at a variety of entity level deals, single transactions, portfolios, and are hopeful to announcing something along that at some point.

Great. Thanks, guys.

Thank you.

Next question is follow up from the line of Josh Attie with Citigroup, please go ahead.

Hi, thanks. Just a follow up on the leverage discussion. Sounds like future acquisitions may not be 100% equity funded, what do you think the appropriate leverage level is for the company on normalized earnings?

Sure. Ken you want to talk about in terms of coverage and peak and trough?

Yes. Great question it speaks to right to cycle our appropriate strategy. We think on a normalized basis, we should be aspiring to 1.4, 1.5, 1.6 times coverage. And that translates in to even higher coverage levels as that cycle peak approaches. Obviously lower coverage at cyclical inflection points like we are in right now. We think if you want to talk about normal. I don't know if at any point the cycle is normal. 1.5 times coverage is probably the middle ground for us.

Does that include preferred dividends or just interest?

That's inclusive of all fixed charges.

Okay. Thank you.

You're welcome.

Thanks, Josh.

I'm showing no further questions at this time. I will now turn it back over the management for any closing remarks.

We appreciate your time together and interest in Sunstone we forward to speaking to you in fall in our Q3 interquarter update.

Thank you, ladies and gentlemen this concludes our conference call, thank you for using AT&T conferencing