Sunstone Hotel Investors Inc (SHO) 2010 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Sunstone Hotel Investors third quarter earnings 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, November forth.

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.

Good morning, everyone, and thank you for joining us today. By now you should have all received a copy of our earnings release which was released earlier this morning. If you do not yet have a copy you can access it on our website at www.sunstone hotels.com.

Before we begin this conference, I'd like to remind everyone that this call may contain 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 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. To begin today's call, I'd like to turn the call over to Art. Please go ahead.

Bryan, thanks a lot.

Good morning, everybody. Thanks for joining us today. During today's call, I will provide you with a detailed review of the third quarter results, as well as emerging demand and operating trends. Finally, Ken will provide additional detail on our credit profile. recent finance transactions and certain refinements we've recently made to our liquidity and leverage targets. All RevPAR margin figures I'm going to discuss are pro forma for our 30 hotel portfolio excluding the Royal Palm Miami Beach, which we acquired during the third quarter, and which is in the planning stages of a major renovation set to commence during the fourth quarter. Adjusted EBITDA and adjusted FFO per share reflect the operations of the Royal Palm for our period of ownership.

Adjusted EBITDA for the third quarter was $38.9 million, and adjusted FFO per share was $0.14. Please refer to our earnings release for a reconciliation of pro forma adjusted EBITDA and adjusted FFO and adjusted FFO per share to income available to common stockholders. To the third quarter, our total portfolio RevPAR came in slightly higher than previously announced, at 3.3% above prior year. Occupancy decreased 1 point, and average daily rate was up 4.8%. third quarter margins were flat the last year. It's important to note that the third quarter margins were negatively impacted by one-time costs associated with the implementation of Marriott's Sales Force One, approximately $358,000. Excluding this nonrecurring expense, margins for our comparable 30-hotel portfolio would have increased by 25 basis points. For the Sales Force One implementation charge, Marriott has assured ownership this represents an investment which will garner a strong long-term return. So far, there have been some growing pains, as you would expect within any major process change. We are watching performance very closely and will verify we are indeed receiving a return on our investment.

Year-to-date RevPAR through October is up 1.8% to last year. Year-to-date we continue to see strength from our gateway market hotels. We switched over to regional performance. In terms of regional performance for the third quarter, the year-over-year growth in RevPAR for LA, Orange County and our La Jolla and Delmar hotels all grew at the same rate, 6.9% year-over-year as compared to the third quarter 2009.

Now we've mentioned volatility in growth trends during prior calls. During the third quarter, we saw such volatility in our West region which was down 7.1% compared to last year. Portland Marriott was up 15% on RevPAR compared to third quarter 2009, but this strong growth was offset by continued weakness in Houston, and Park City, both of which were down 10%. We expect continued weakness at our Houston properties into 2011 due to the loss of a significant piece of annual government business. Our Midwest region was up 3.8% to last year, driven by double-digit growth in Minneapolis and positive ADR growth in Chicago. Finally, our East region was up 3.5% for the third quarter, a growth trend which, as we've previously indicated, was muted by shifts in group business and difficult comps in three of our largest hotels, Renaissance DC, Renaissance Orlando, and Renaissance Baltimore. We expect double-digit RevPAR growth at both Orlando and Baltimore and high single-digit growth at DC during the fourth quarter. New York City and Boston continued to outperform, turning in RevPAR gains of 8.1% and 6.1%, respectively, third quarter. Putting in some perspective, excluding our three convention hotels, again DC, Baltimore and Orlando, and our two Houston hotels, all of which were negatively impacted by either difficult comps or loss of government contracts, our third quarter RevPAR for our portfolio would have been up 6.2% and the margins would have been approximately 90 basis points higher.

Let's talk a bit about improving business trends and business mix. As expected, October's results reflected a RevPAR re-acceleration as compared to the third quarter results. October RevPAR for our portfolio finished up 5.8% to last year. Our three large convention hotels, again Renaissance Baltimore, DC and Orlando, were up 9.1%, 11.1%, and 35.3% compared to October 2009. For the combined second half of 2010, we expect RevPAR for our 30 hotel comparable portfolio to increase between 4% and 5% as compared to the second half of 2009. As we and many of our peers have previously mentioned throughout the cycle, we do not expect to see a smooth growth in RevPAR. As we witnessed at our three big boxes in the third quarter, there will be quarters where, depending on our market concentrations, we will either outperform or underperform the US upper upscale numbers. That said, over the cycle we believe our concentrations in gateway markets such as New York, Boston, Philadelphia, Chicago, Washington DC, Baltimore, Orlando, and Miami will outperform the US upper upscale average. During the last cycle, these markets produced over 50% of our total EBITDA.

2011 pace is up 5%, driven by a 3.2% increase in occupancy and a 1.8% increase in ADR. Our three largest group hotels are booking rooms in 2011 at rates in excess of 10% higher than what it was on the books in 2010. Although it's still early in the process, feedback from corporate volume negotiations are indicating rate increases from 4% to 8% depending on the market.

Let me talk a bit about Royal Palm. We completed that acquisition October 27. Today we've announced that the Denihan Hospitality Group will manage the property and we will reflag it to one of their brands upon completion of the renovation program which is currently in the planning stages, and we expect completion in late 2012. For those of you who are not familiar with this asset, Royal Palm is forever real estate in a truly international market. Almost 50% of the occupied rooms in this market are international. South Beach is a destination that commands high rates, and is dominated by unique assets. In order to drive the highest possible NOI and maximize the value of our location, we believe that the Royal Palm should be positioned as a high-end, boutique hotel focused on a sophisticated traveler that wants to have the South Beach experience without sacrificing comfort, service levels. Throughout our manager selection process we were focused on aligning ourselves with a world-class operator that would work well with our asset management team through all stages of our ownership of this hotel, including positioning, design, renovation and operation. Denihan is that world-class operator with the institutional expertise to run high-end boutique hotels with exceptional margins.

In the context of the market and the target customer, we believe the benefits of the Denihan Hospitality Group will allow them to outperform a traditional brand. South Beach is a market that's dominated by independent hotels. Customers seek out unique properties based on location, amenities, service levels, and room type offerings. Suites specifically are in high demand in South Beach. And while the major brands did offer incentives, such as key money, in an effort to secure the management contract on the hotel, this inducement comes with a cost embedded in terms of the management agreement, including longer terms, an easily achievable extension, reduced ability to terminate the operator, and limited ability to influence the hotel strategy and cost structure. We ultimately concluded that the major brand alternatives were unlikely to maximize cash flow and could significantly impair residual value for the Royal Palm. The comparison on a market segment basis shows that independent hotels in the top markets tend to outperform their branded competitors.

Our conclusion in the case of the Royal Palm was that a boutique brand will provide for the highest possible rate, an expedited renovation process, a collaborative process regarding the operations of the hotel, and highest residual value, through the ability to sell, possibly unencumbered, while eliminating the downside through termination provisions. More importantly, the Royal Palm is as important to Denihan is to Sunstone, as the hotel will become a flagship property for both of our companies. And its success may lead to future opportunities for us to work together. Our interests are completely aligned and Denihan will provide every resource it has to ensure the success of this property.

In addition to our asset management efforts in South Beach. I would like to take some time to drill down on a few of the operations and asset management initiatives that Marc Hoffman and his group have been focused on. First of all, driving rate. We're continuing to selectively drive rates wherever possible as a key asset management initiative. In the third quarter, 19 of our hotels achieved an ADR increase over the prior year. The majority of these rate increases were achieved through mix shifting business and limiting lower rated discount bookings. We had success with this strategy at Marriott Boston - Long Wharf, Renaissance LAX, Marriott Troy, Marriott Rochester, Kahler Grand Rochester. For example, Kahler Grand used this method to increase the rate 16.9% in the third quarter. And as I mentioned on our last business update call, we've also driven meaningful rate gains in Times Square, Minneapolis and Tysons Corner. All three of these hotels, along with our Portland Marriott and Newport Hyatt, showed high single digit to double-digit RevPAR growth. Many of our hotels improved their RevPAR index in the third quarter with Renaissance Baltimore, Marriott Rochester and Sheraton Cerritos all gaining more than 5% in market share.

Driving efficiencies. After two years of intensive focus on driving efficiencies, while year-to-date occupancy is up 1.3 points, our productivity initiatives have reduced total portfolio man hours. For example, in our Marriott managed portfolio, total hotel man hours are down 2.8% year-to-date versus the same period in 2009. In terms of some other initiatives, we've been upgrading our parking. We are evaluating and upgrading dated parking equipment with state-of-the-art systems that are maximizing revenue by reducing leakage and increasing garage productivity. At Renaissance Orlando, where we recently upgraded the system, we have seen an over 60% increase in parking profit. We're planning to install these new systems in four of our hotels, Tysons Corner, Quincy, Delmar Hilton and Minneapolis.

Looking ahead, beginning this quarter we have resumed quarterly guidance . Our commitment to you, our investors, has been to provide timely, accurate information to help you understand and evaluate our Company. We believe operations have now stabilized to a point where we are able to provide you with reasonably reliable information for the upcoming quarter. We will continue to supplement quarterly guidance with our intra-quarter business update calls, to provide you with real-time updates on how our portfolio is performing each quarter.

For the fourth quarter, we expect RevPAR for our 30 hotel comparable portfolio to increase between 5% and 7%, adjusted EBITDA to be between $38 million and $42 million, adjusted FFO per share to be between $0.15 and $0.19. The fourth quarter guidance presented today does not include the impact of any acquisitions or dispositions or the write-off of any deferred financing fees or interest expenses related to our recent financing initiatives. While our fourth quarter estimates are slightly below street consensus, let me make it clear that our optimism for the growth potential of our portfolio is as strong as ever.

Let me also direct your attention to page 10 of our earnings release. We've gone to great lengths to provide you with a pro forma adjusted EBITDA, adjusted FFO and adjusted FFO per share for our year-to-date numbers through September. These numbers reflect our 30 hotel pro forma as if all acquisitions and deed backs occurred on January 1, 2010. It also includes our ownership period of the Royal Palm during the third quarter. We expect the Royal Palm to produce approximately $3 million of net income in 2010.

And with that, let me turn the call over to Ken to review our liquidity and initiatives. Ken, go

Thank you, Art. And thanks to everyone on the call for joining us today. Today I will briefly review our credit profile, the three finance transactions we closed this week, and I'll finish by discussing our formal liquidity, coverage and leverage targets. First, with respect to our current credit credit profile, we ended the quarter with approximately $144 million in cash and cash equivalents including restricted cash. We hold 12 unencumbered hotels. Our debt maturity schedule is a key strength. Through April of 2015, we now have just $100 million of debt maturities. And we have a well staggered maturity schedule thereafter. And with an average tenure of 7.2 years, the average term to maturity of our debt is the longest in our space. 100% of our interest expense is fixed-rate, with a weighted average cost of debt at just 5.5%. We've made good progress in our credit profile year-to-date, and, as I'll discuss in a moment, we're committed to continuing to enhance our credit statistics going forward.

Consistent with that goal, my second topic is our recent finance transactions. Earlier this week we closed on three deals. Collectively, these transactions improved our liquidity, extended the average term to maturity of our debts, reduced our cost of capital and generally increased our financial flexibility. The first deal I'll discuss is the closing of the deed back of eight hotels to Mass Mutual. This transaction has been in the works for over year. And it was completed on November 1. The transaction resulted in the elimination of approximately $163 million of near-term debt. The Company will record a gain on extinguishment of debt to discontinued operations in the fourth quarter of 2010, and the net assets and liabilities associated with the eight hotels in this portfolio will be removed from our 2010 balance sheet. A portion of the gain on this transaction will be deferred until all customary contingencies related to the deed back are resolved or expire. This transaction completes our 2009 secure debt restructuring program. Once again, we would like to thank Mass Mutual and the co-lenders for their consummate professionalism throughout this process.

The second transaction I have to discuss is the Hilton Times Square refinancing. Also on November 1, we entered into a new $92.5 million nonrecourse mortgage secured by our 460-room Hilton Times Square hotel. The new mortgage matures in 2020, and bears a fixed interest rate of just 4.97%. The proceeds from the refinancing were used to repay the previous $81 million mortgage with the balance of the excess proceeds retained for general corporate purposes. Bank of America serves as underwriter for this GMBS transaction.

And the final transaction I have to discuss is our new corporate credit facility which we also closed on November 1. Monday was a pretty busy day here. Our $150 million corporate credit facility bears grid interest ranging from 325 to 425 basis points over LIBOR, depending on the Company's leverage ratio as expressed in terms of net debt to EBITDA. The facility's initial term is three years with an option to extend for an additional year. The facility may be increased to up to $250 million, subject to lender approval. The facility is senior in ranking and is secured by guarantees and pledges from certain of our subsidiaries. The facility is not secured by mortgages. The joint leads of the credit facility are Bank of America and JPMorgan, and the co-lender group is comprised of some of our primary banking relationships -- Barclays, Morgan Stanley, Citi and UBS.

My final topic today is our formal liquidity, leverage and coverage targets. Liquidity and credit profile are key focus items for Sunstone, and accordingly, we recently refined our targets to take into consideration the volatility, seasonality AND inherent risks associated with our portfolio of lodging assets AND our business model. As well as OUR investment, dividend and total return objectives.

First, with respect to liquidity, we believe it's appropriate for Sunstone to maintain a cash buffer, not including amounts on our credit facility, in an amount equivalent to approximately one-half to three-quarters of our expected forward 12 months of net fixed charges, which we define as capital investments, debt amortization and maturities and preferred dividends. Simply put, in the context of our current operations, this equates to target cash balance of between $75 million and $125 million. Based on our ongoing internal risk assessment process, at times we may increase or decrease our target liquidity position.

And second, with respect to leverage and coverage, within the next 18 to 24 months we are targeting corporate leverage, defined as net debt to EBITDA, of approximately 6.5 times. And we are targeting corporate fixed charge coverage, defined as EBITDA less FF&E reserves, divided by interest expense, preferred dividends and amortization of approximately 1.6 times. In addition to continued proactive balance sheet management, we plan to achieve these credit targets through four measures. Disciplined acquisitions, capital enhancements to our existing portfolio, revenue maximization tactics, and by driving operational efficiencies.

To wrap up, while, as Art indicated, we are not satisfied with our operating results this quarter, our focus is on continual improvement. As we step back from the details of the quarter, and we think generally about the next several quarters and years, we can't help but be very optimistic about our future. Industry fundamentals are strong and we are focused on growing our Company smartly, and continuing to improve our credit and liquidity profile. While we will inevitably encounter bumps in the road as this recovery progresses, our portfolio of high quality, urban, upper upscale hotels, coupled with our appropriately levered balance sheet and our proactive, disciplined approach to all aspects of our business, fuel our optimism for the future.

With that, I'd like to thank you for your time today and turn the call back over to Art.

Thanks, Ken. And let me close out the call by talking a bit about acquisitions and our outlook for 2011. When they hand out the Olympic medals for the most volume of hotels bought in 2010, the bronze will be out of our reach. But when it comes to who's on the podium for some of the smartest and best deals done, we believe we're in the hunt. We've picked our spots and believe each and every one of our deals have exceeded the mark in terms of value creation. In fact, based on market comps and third-party analysis received in the past month, the four hotels we reacquired pursuant to our secured debt restructuring program and the Royal Palm, are currently estimated to be worth considerably more than our basis. Combined with our internal assessment of our various debt investments, we are conservatively placing the fair value of our year-to-date acquisitions at a level well above our $230 million investment basis.

While we do not expect all of our future investments to result in such significant near-term value creation, we will stay the course and make only disciplined, smart investments that we believe are likely to create value. We continue to evaluate investment opportunities in our various stages of the acquisition process in a number of deals. We're confident we will execute on acquisitions that are additive to the portfolio. In addition to external growth, we continue to evaluate opportunities to invest in our existing portfolio. We believe investing in capital improvements and ROI projects in our existing portfolio represents a lower risk, higher return potential than many acquisition opportunities that we're seeing. Moreover, as we're coming out of the cyclical trough, renovations completed in the near term are likely to result in less displacement than would occur if we waited until the recovery matures. And finally, capital expenditures are currently on sale, as both materials and labor costs our materially below their recent levels.

We believe that through a balanced approach of investing in both external and internal growth opportunities we will maximize our return to our investors. Looking to 2011, while it's still very early in the budgeting process, several of our hotels are currently projecting double-digit RevPAR increases while most of our hotels are projecting high to mid-single-digit increases in RevPAR. As we proceed with the 2011 budgeting process, I continue to believe that based on pace and feedback that we're receiving from volume account negotiations, there is a case in several of our markets for double-digit RevPAR growth in 2011. So, combining our acquisitions track record in 2011, a healthy 2011 outlook, coupled with the right capital structure, again as Ken mentioned, liquidity and access to credit well in excess of our next five-year debt maturities, our debt being fixed at 5.5% averaging nearly seven years of life , having concentrations in outperforming markets like New York, Boston, DC and Rochester, combined with increasing operating results, I am optimistic about the hotel industry at large, and in particular the prospects for Sunstone and its stockholders.

And with that, I'd like to open up the call to questions. So Luke, please go

Thank you. (Operator Instructions) Your first question today comes from David Loeb from Baird. Please go ahead.

Good morning -- still morning for me, and you. I just had two questions and maybe 27 follow-ups. On the Denihan deal. I really appreciate the color you gave about the residual values and why you think that was an important decision. But can you talk a little bit more about the management contract or other inducements that Denihan may have provided that made this the most attractive alternative?

Yes, David, again, I do appreciate the 27 follow-ups. As you might appreciate, going into detail on management contract terms is something we can't do because they typically have a confidentiality provision that prevents us from doing that. I think the adjectives you used -- flexible and meaningful termination hurdles -- are good descriptors of the contract. And it is a point of comparison, certainly far superior to what one would get from a nontraditional brand.

Okay. So that doesn't necessarily mean there was capital involved or guarantees of that kind of thing?

Correct.

Okay. Second question, what's your view on acquisition market today? Clearly you made some really good transactions already, that have created a lot of value, but do you think there are still opportunities like that out there? And if so, what does your pipeline look like?

David, great question. What's funny is when we did our equity raise over a year ago in October, the first acquisitions trip I took the following week was to Miami Beach. And one of our key targets was the Royal Palm that we were very focused on trying to acquire. It happened at the end of August many months later . I'll tell you by waiting for that transaction to happen the way it did, we paid a little less and had a little risk involved. So, using that as a single case, we continue to look at assets, we continue to get close to assets in terms of bidding for them. But, we are going to continue to stay selective in terms of what we close on. And as always, pick our spot.

Historically, deal volume slows down at the end of the year because nobody wants to be working on deals over the holidays and things change. So, we're seeing a few less deals now than we did in the middle of the year which is historically a time for things to pick up. Also, historically, at the Dallas conference in January is usually a big launch. So I think generically, with those granular points made, there's less deals out there and I'd expect around Dallas to see a lot more to

What do you think the pricing will look like relative to recent trades when those deals come out?

Outrageous to high. But I'm hedging my bet. What's interesting is the brokers, assuming that the REITs are the most logical buyers, are simply taking assets, putting the peer group's current multiple on it and saying that's the ask. The challenge is, if they're setting sellers' expectations at those numbers, and since Sunstone, probably like our peers, compares acquisitions to the organic growth in our portfolio, there'll be a lot of assets that we don't think will grow at a higher rate than our portfolio. In addition, we've just gone through a period where not a lot of assets have had meaningful CapEx spend on them so all of these transactions are probably going to require a fair bit of CapEx. If one even looks at an accretive multiple, one has to ask how much CapEx is going to be required to catch them?

Okay great, I can beep back for the other 25.

Excellent David. I was surprised and pleased to see you as the first caller.

Your next question comes from Joe Greff of JPMorgan. Please go ahead.

I joined the call a few minutes late so I don't know if I'm asking a question that you address. But did you give your 2011 CapEx budget for next year or if you didn't can you provide it?

Joe, we didn't. I made some mention on the end that we're looking at it, and here's why we haven't given the exact number. We're still in the planning stages of which projects we're going to do. Let me give you an example of why we're fluid on that. A hotel like DC where we're talking about, say, $30 million to $40 million rooms renovation, we're really looking at the convention calendar for 2011 which is going to be a record, and then where the holes are in 2012 to try to figure should it be late in the year, should it all be pushed to 2012. And so with that as an example, we're hesitant to say the number 2011 is X. I think in past calls we talked about $72 million to even $150 million of value add, possible CapEx that we continue to evaluate, refine the scope, look at when to do it. So, that was a long way of saying no we didn't.

How do you think about the returns on the basket of things that you're considering relative to the returns or yields in the acquisition market?

Great question. Generally, in the low to mid teens in terms of returns. And that's just on a cash on cash. Depending on the type of renovation, it may or may not have a residual value. Clearly carpeting doesn't. But redoing lobbies and redoing bathrooms and concepting food and beverage, as we're going to be doing at Longmore, certainly do have residual values. But more in the ballpark of mid teens.

Got you. And then with respect to the fourth-quarter RevPAR guidance, thank you for giving that, how much of that is rate driven?

The majority of it is, I would say, approaching 100%. And so consequently, the question we should ask is flow-through should be pretty high on that basis.

Okay. So let me ask then, what's implied then from a flow-through perspective to the hotel EBITDA line item?

That I don't know if I would speculate on, but 75% or thereabouts.

Thank you, guys.

Your next question comes from the line of of Dennis Forst from KeyBanc. Please go ahead.

Good morning. I wanted to see if you have your arms around the amount of money you're going to spend on the Royal Palm next year. You gave a very wide range there a minute ago, Art, $70 million to $150 million. I assume that does not include anything for Royal Palm.

We're still working on, I think we've talked about in the past that the renovation number could be as high as $35 million.

Say that number again?

$35 million. In terms of timing though, it has a lot to do with when we get done with the review process, historic preservation board. So, while that's the budget number, how much of that gets put into '11 and '12 is still uncertain.

Okay, so $35 million doesn't sound like a lot to take two years, but more of it is in getting approvals and design and things like that?

That's right. Listen, Miami Beach is a market where one has to be conscious of not only delivering a product that's good for customers, but is sensitive to the historical nature part of the building, as well as our neighbors. And so one wants to be methodical and sensible in that approach as opposed to just going in and starting to renovate the next day. So you're right, it's a little longer than, let's say, we're doing on the rooms renovation at the Embassy Suites Chicago which gets done in four months.

And the picking of Denihan. Can you give us a little bit of your thinking of why you chose them, what's their experience in this type of a product they gave you confidence that they would be the right party?

I'd love to talk about that because clearly we've tought about it a great deal. As you might appreciate, there was a lot of interest from a lot of management companies, up-and-coming brands, brands we had never heard of, emerging brands, well-known companies. So we really had a wide selection to look at, which certainly speaks volumes as to the value of the asset and the location. Interestingly, we started with over a dozen companies, interviewed five or six and the one thing they all talked about was a customer who comes to Miami Beach whose need is not met. And the way every company, regardless of if they were independent, boutique, high end, kind of edgy, standard, branded hotel, they described this customer exactly the same in terms of demographics and what they're looking for in terms of service experience and design experience. And so knowing that is the customer who is, in the end, has an unmet need in terms of a product that isn't available in Miami Beach, we then asked ourselves what company is going to best serve that customer.

The other things we looked at, to run through a litany of things, Miami Beach is a highly seasonal market where a lot of your NOI happens in the first four months. And as such, preferred guest programs that the brands have, which provide a great base of business all year long in less seasonal markets like, let's say, New York City, in Miami Beach one doesn't necessarily want the first couple hundred rooms at under a $100 rate to fill the hotel . Also preferred guest programs typically use some of your most valuable real estate to be given away for free. And your suites, which comprise almost a third of our inventory at this hotel, are also given as upgrades. As we mentioned on the call, 50% of the guests in Miami are typically international. And what impressed us about Denihan was their business intelligence about their customer. They were the only company that came in that could say definitively, here is where our customers are coming from. They had the highest percentage of international travelers in their current portfolio compared to anybody else, and had a meaningful number of turn-aways in terms of requests for Miami Beach. Also what's important, and you talked about the two-year timing, being nimble and responsive in a renovation program like this is very important. And a lot of times, to just give you an anecdotal story about a brand, not to be named, it took them two months to approve carpeting for a ballroom. We can't have those kind of delays when there's $120 million of cash sitting in an asset that we're waiting to open up.

Also, New York City's the biggest domestic feeder market, and because Denihan is very well-known, they've been in the hotel business 50 years, that that's going to add a lot of value, as well. One thing I look back at is, when La Salle put Kimpton in four properties in DC a number of years ago, when Kimpton was an up and coming company, now Kimpton is over 50 hotels and I'd arguably say as much of a brand as any of them, they really took advantage of a company who was in its growth phase and was very focused on doing every hotel right. We see that in Denihan. And I'll tell you candidly, what this last cycle taught us, when you're one hotel out of a 500 or 1,000 hotel chain, if that hotel isn't doing well, you get a form letter. For a company like Denihan, every hotel must succeed. And I'll tell you our business has much to do with personal commitment. And having two years to get this ramped up,and Denihan already having international sales offices to help feed and create awareness for this hotel, they really impressed us with that thought. So I know that's a long answer, but there were just a lot of things about them that impressed us, and in a way made the choice easier than we

Okay that's a great answer. Thank you very much. I had another question. I'll have to log back in, I forgot that last question. Thank you.

Your next question comes from Shaun Kelley at Bank of America Merrill Lynch. Please go ahead.

Good morning , guys. Just a quick question. First of all, interested to get your thoughts on the brand you chose and specifically thinking about your strategy with independents going forward, Art you mentioned the Kimptons in the past, can you talk a little bit more about how we might think about that for future opportunities? Is there a change at all or a shift at all in strategy? Are you going to look more heavily at independents going toward than maybe you have in the

I think very consistent with what we've done in 2010, when we did our management RFP earlier this year. The management brand business is really metaphorically different horses for different courses. There are different types of hotels and markets where certain companies really outperform and there's others where they don't. So we're really going to make those decisions on a situational basis. That there's no one company that outperforms for all assets in all cities. It certainly should show that we are open to a variety of different operators and aren't going to just simply take the safest , easiest to explain choice and are going to focus on which one we think is going to deliver the highest

That's helpful. And then maybe to switch a little bit, in the prepared remarks you talked a little bit about the driving of rate at some of the different hotels, and you gave some specific color. I couldn't help but notice that a number of the ones you talked about as performing best on the ADR side were Marriott. And I was wondering, did you see any brand differentiation in terms of the strategic push there? Was it different by operators at some of the hotels?

I wish it was by brand. It was more market by market. And listen, I'll add anecdotally, on the prepared remarks we pointed out all our successes. There were some times where we pushed rate too hard and lost occupancy and really lost RevPAR and RevPAR index. So, it was more, to use the too often used phrase, street corner by street corner and had less to do with the brand and more to do with the market.

And just one on a specific market, and I apologize if you did give a little bit more color here, but I think in Houston you mentioned loss of a specific government contract or some government business. Is that hotel specific or is Houston suffering from some bigger market issues? We've seen them consistently under perform on the RevPAR indices for a while. Thanks.

Of the three things impacting our hotels, the loss of that government contract business is the most acute of the impact and impacts that sub market. Second is new supply. There's a number of assets that have come into that market that have really diluted it. And thirdly, with the disruption of what happened in offshore drilling, which is a big part of the corporate demand in that market, that really had some impact, as well, to that sub market. So less of a commentary on Houston and more about the sub market where our two hotels are located.

Great, thanks again.

Your next question comes from the line of Ryan Meliker of Morgan Stanley, please go ahead.

Just a couple little things here. I don't mean to push you too far, but thinking more about Denihan. Twofold. Number one, can you tell me a little bit about if the fact that Denihan owns the majority of their properties, and this would only be one of a handful that they operate, came into play, if that factored into their understanding and the decision-making process. And two, given that Denihan isn't really known as much for having a big central reservation system, is there a thought to potentially also affiliate the Royal Palm with maybe a preferred or leading hotels of the world to try and boos some of that international exposure? And then on another note, regard to RevPAR, maybe I misunderstood, I probably misunderstood, but did you say October RevPAR was up only 1.8%? And if that's the case, can you give us some color on the confidence to that 5% to 7% for the quarter guidance? Thank you

Sure, I'll take them in reverse order. I said year-to-date through October was 1.84%, October. I referenced that our portfolio finished up 5.8% for the month.

Wonderful, I thought I might have misunderstood that. Thank you.

Thanks for giving me the opportunity to remember what I said. I always like being able to do that on the calls. Bouncing around, in terms of Denihan, the fact that they own hotels was an important consideration. When you manage for yourself, the way they approach strategy, the way they approach renovations, they get the time value of money. We don't have to educate them on what it means to be an owner. Quick answer, yes. That was an important differentiation in looking at them.

In terms of affiliating the hotel long-term with leading hotels, preferred hotels, hotels of distinction, something like that, listen, never say never. But what impressed us about Denihan was their properties had a high percentage of international travelers already. So they already have recognition in the key markets that drive Miami -- South America, Canada, UK, Germany. So they already have that recognition with a traveler that pays the rates they we're looking for. So, that could be something we look at down the road but as the strategy there is going to be more about starting with the right rate, instead of discounting and filling it, I would see it probably as something less likely.

Did I miss any of your questions?

No, I think you got it. Thanks a lot.

The next question comes from Chris Woronka of Deutsche Bank. Please go ahead.

Hi, guys. Can you share with us, in terms of on the group side, how much business you booked in '08 and '09 for '10, and then how much of that is still here in '11 and maybe even looking out to '12, just to get a sense?

So the question is, how much of the business we consumed in '10 was booked in '08 and '09, and how much of it is booked in '08 and '09 for '11?

Yes. What's the roll off of some of that less valuable business going to be?

Marc Hoffman is with us in the room. Let me have Marc comment on that. Marc, why don't you go ahead.

The reality of it is the only thing left that really actualized in '10 or will actualize in '11 that was booked in '08 or '07 really only being our three big hotels -- Orlando, DC and Baltimore. And it's very limited. Most likely just in DC. Baltimore is really about an 18 month house. Orlando's a two to two-and-a-half year house. So we're getting to the point where most of the stuff in '11 will have been booked in late '08, mostly '09 and '10. And the majority of our portfolio then is all booked within really intend for '10 and intend for '11 somewhat.

Okay. Just so I understand that, '11 could have a slight drag from business booked during '09 or late '08, and then you would see a bigger impact, a better impact in '12?

No I don't really think there's any drag in '11 from '08. Most of '11 stuff is going to be more recently booked. And it won't be a drag from late bookings. We're seeing, our current trends for 2011 had ADR up over 2010 and CR pace increasing.

Okay. That's helpful. And then, Art, I apologize if I missed some commentary earlier. But in terms of looking at a few hotels that you might want to sell on a longer term basis, do you think the market, is this a market you're willing to test? And how are you guys looking at it? What I'm asking is, how are you underwriting your expectations for better RevPAR versus the pricing that may be there now that may not be there in another year or so?

I hadn't thought about whether pricing wouldn't be there a year from now. Our believe is pricing will be better. I hope we're right about that. But we continuously evaluate our portfolio, and I think as we've demonstrated in the past, all the way back to the Century Plaza, that if we receive a compelling offer for an asset that's above our existing value, we're likely to act on that. We've said we invoke a cycle appropriate strategy, so it's certainly more of a time to be a buyer than a seller. And while there's been a number of trades out there that have made a lot of people ask the question you've asked of us -- with prices at that, if you're not a buyer, you should be a seller. Most of the buyers are our peers, and as you well know, REITs typically don't buy from REITs so really the buying tool for us is a little bit smaller. We look at clearly, if the question is one of metrics, how does that compare to our existing multiple, how does a hotel compare to our organic growth rate of our overall portfolio. And so those are the initial screens we look at when evaluating a sale. So we could test the market with an asset or two that we think is going to be an under performer compared to our portfolio.

Okay, great. And just one final one. On the Royal Palm, that's a market where sometimes there's some benefit to owning more than one asset. Are you guys willing to, if the right thing was out there, would you take a second property in that market, not solely from a synergy standpoint but partially from a synergy standpoint? Or was that really entirely a one off?

We would definitely look at other assets in Miami. Part of our investment strategy has been to double down in markets and experience some sort of synergy, and Miami Beach is no exception to that.

Okay. Great. Thanks.

Your next question is a follow-up from Dennis Forst of KeyBanc, please go ahead.

I was going to ask about how Miami Beach fits into your strategy of major urban market business travel? This is somewhat far afield of that.

Yes, Dennis, it certainly fits into, when you look at our investment strategy, what we said we were going to focus on, our out-performing markets. And we've looked historically at Miami in going forward in terms of demand generators, and our belief is, and I think many people believe, it's going to be an out-performing market. Also, what we like about Miami Beach is, given the percentage of international travelers that go there, it provides a bit of a hedge to the US economy, that if the US economy underperformed international economies, that we'd experience an upside without having to be there. And it also, consistent with our investment strategy, plays to our strengths. Marc Hoffman has spent many years there overseeing high end hotels and redevelopment of hotels. It's something that we have done in the past. So, true, when you look at Sunstone and say Sunstone's existing portfolio is business traveler first, group house second, I don't think we'll focus solely on the type of customer, more of opportunities that are consistent with where we think we can add value.

Okay. And, for Ken, with the deal with Mass Mutual, giving back the eight hotels, beginning first quarter of 2011, we should no longer have a few lines in the income statement, revenues from operations, held for sale, operating expenses held for sale, and interest expense from operations held for non-sale disposition? Those lines go away probably?

Yes, Dennis. Sure, your life will get easier when you do the analysis. As we mentioned on the call we do have a pro forma analysis in the back of the release. But, going forward into 2011, we will remove the asset held for non-sale from our balance sheet.

Okay. And the last question, I might have missed this, but corporate overhead was $11.5 million in the quarter. Real big number. What was included in that?

Yes. This year we have to also run through corporate overhead our transaction costs,. there's roughly $6 million of transaction related expenses in the corporate overhead number.

In that quarter?

Yes.

Were there any transaction costs in the first two quarters or were those more normal?

Less significant.

And the $6 million, is that all related to Royal Palm?

A portion of it is related to another transaction we looked at during the quarter, as well.

Okay but even though the Royal Palm closed in October, a lot of the transaction costs were included in the third quarter?

Actually the Royal Palm closed in August, so that was included in the quarter. And the reason you see a big transaction cost number there is because that was bought out of a foreclosure auction and so there's just a number of additional expenses that will run through on that type of transaction versus a typically marketed deal.

Okay. So, that number will, or the corporate overhead is going to vary going forward depending on the deals you do?

That's right. But we will add back those items typically for our adjusted EBITDA number.

Okay. So I can find it on that schedule, the add back of that?

Yes.

Good enough. Thank you.

Your next question comes from Josh Attie of Citigroup. Please go ahead.

Thank you. Art, I think you mentioned in your prepared remarks that you thought the value of Royal Palm had increased since your purchase. First, did I hear that correctly? And if so, can you clarify that and talk about deal comps or data that might support that, or why you think that's the case?

Thanks for asking,Josh. Yes, the reason we believe that is not only based on the calls that we got after closing on the deal, but more so having put that asset in the line of credit, and based on the valuation process that the value for the asset came back, at least from that perspective, at significantly higher than what we paid for it. So, the two points are, valuation for use in the line of credit and then just inquiries, marketing inquiries.

Thank you.

Ladies and gentlemen this concludes the question-and-answer session. Mr. Buser, please go ahead.

Thanks. We appreciate everybody's time today, your continued interest in Sunstone. We look forward to speaking to you in January for our fourth quarter intra quarter update. Thanks again.

Ladies and gentlemen, this concludes the conference call for today. Thank you for your participation, and you may now disconnect your lines.