Sunstone Hotel Investors Inc (SHO) 2011 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Sunstone Hotel Investors first quarter 2011 earnings call.

(Operator Instructions).

As a reminder, this conference is being recorded today, Friday, May 6. I would now like to turn the conference over to Mr. Bryan Giglia, Senior Vice President of Corporate Finance of the Sunstone Hotel Investors. Please go ahead, sir.

Thank you, Brittany. And good morning, everyone, and thank you for joining us today. By now you should have all received a copy of our first quarter earnings release, which was released yesterday after market close. If you do not yet have a copy, you can access it on our website at www.sunstonehotels.com.

Before we begin this call, 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 EBITDA margins. We are providing that information as a supplement to information prepared in accordance with generally accepted accounting principles.

With us today, are Ken Cruse, President, John Arabia, Chief Financial Officer, and Marc Hoffman, Chief Operating Officer. After our prepared remarks, the team will be available to answer your questions. I would like to start today's presentation, and turn it over to Ken. Ken, please go ahead.

Thank you, Bryan, and thank you all for joining us. I'll cover 5 topics today including, 1, our first quarter performance, 2, outlook for the remainder of the year, 3, recent acquisitions and perspective on future external growth opportunities, 4, balance sheet objectives.

And finally, our team, including the addition of Robert Springer as the head of Acquisitions. After that, Marc will cover operational details, and John will review finance details, before I wrap up our prepared remarks, and open up the call for questions.

I'll begin with our first quarter results. Q1 was a somewhat messy quarter, and while our performance was affected by a number of factors such as renovations, a shift in portfolio seasonality and timing of acquisitions, when you cut through the noise, our fundamentals were very solid. Pro forma RevPAR for our 33 Hotel Portfolio increased 7.6%.

Renovation activities displaced approximately $1 million of revenue in the first quarter, and also negatively impacted our margins by over 100 basis points. Adjusting renovation properties -- adjusting out our renovation properties, our 33 Hotel Portfolio generated pro forma margins of approximately 24.3%, an improvement of 40 basis points over the prior year.

While our renovation efforts typically do result in some short-term revenue displacement, we expect our program will drive significant long-term value creation, and enhance growth potential for our portfolio. Marc will go into more detail, regarding our operating results and renovation activities in just a moment.

While our full-year projections remain in line with Street consensus, our Q1 adjusted FFO per share fell slightly short of Street consensus, which clearly means we should have done a better job of apprising the Street of our expected performance, especially as adjusted for the moving parts that affected our quarter.

To avoid such disconnects going forward, we have reinstituted guidance. For the full-year 2011, we expect the pro forma comparable RevPAR for our 33 Hotel Portfolio to increase between 6% - 8% over 2010. We expect our adjusted corporate level EBITDA to come in between $204 million - $215 million. And we expect our adjusted FFO per share to come in between $0.78 - $0.88. For reference, we believe the current consensus estimate is approximately $0.86 in FFO per share for the full-year, which falls within our guidance range.

To help investors understand the new seasonality of our portfolio, we've also provided pro forma 2010 results with our 33 Hotel Portfolio in our earnings release. In a moment, John will provide more detail on our full-year and quarterly expectations, as effected by seasonality, acquisition time, and renovations. So, let's move on to recently completed acquisitions and dispositions, as well as our external growth prospects.

Since our last business update call, we completed all of the previously announced transactions, including the acquisition of 75% interest in the 1,190 key Hilton San Diego, the disposition of the Royal Palm, and the issuance of $115 million of 8% Series D perpetual preferred equity. Through these transactions, we successfully recycled capital from a redevelopment project that would have required 2 years of cash outflows, into a world-class hotel located adjacent to the San Diego Convention Center, the Gas Lamp District, and Petco Park.

We are pleased with our recent acquisitions and the transformational effect that they have had on our portfolio quality and growth potential. Furthermore, we continue to see a number of attractive acquisitions targets. That said, we will remain highly disciplined, in our acquisition efforts going forward to ensure that external growth is achieved in a way that will be beneficial to our portfolio quality, growth prospects, and importantly, our credit statistics.

With respect to our credit statistics, our stated plan is to increase our financial flexibility and improve our credit metrics in a deliberate and measured way, by driving improvements in operations, by opportunistically paying down certain debt, and by adding additional quality hotels to the portfolio on a credit beneficial basis.

Our objectives are to reduce our debt to EBITDA to approximately 6.5 times, while improving our fixed charge coverage ratio to over 1.65 times by mid 2012. John will also provide greater detail on our balance sheet initiatives and liquidity later in the call.

While we believe the various transactions we've completed thus far this year will drive meaningful value, our greatest potential driver of value is our team. We have continue to complement our existing team of lodging industry professionals by selectively adding new talent. And yesterday, we announced that Robert Springer will join the team as Senior Vice President of Acquisitions.

Many of you on the call know Robert, as he most recently served as Vice President at Goldman Sachs, where he was a key player in the firm's principal lodging investments business. I had the pleasure of working with Robert at Host Hotels prior to joining Sunstone Robert will lead our external growth and capital recycling initiatives, including sourcing, underwriting, and closing targeted single asset portfolio acquisitions, as well as selective asset dispositions, and capital initiatives.

With the addition of Robert, we truly have a world-class team, which includes some of the brightest professionals in our industry, including John Arabia, and Marc Hoffman, Lindsay Monge, our head of Treasury and Administration, Guy Lindsey, our head of Design and Construction, and Bryan Giglia, our head of Corporate Finance.

We, as a team, are aligned in our focus on creating meaningful stockholder value, and transforming Sunstone into the premier lodging REIT, through consistent and disciplined execution of our balanced business plan. I will now turn the call over to Marc Hoffman to discuss our hotel operations in greater detail. Please go ahead, Marc.

Thank you, Ken, and good morning everyone. And thank you for joining us today. All hotel information discussed today, unless otherwise noted, is for our 33 Hotel Portfolio which includes all 2011 acquisitions, the Doubletree Guest Suites Times Square, the JW Marriott New Orleans, the Hilton San Diego, and excludes the Royal Palm, which was sold in April.

Pro forma RevPAR increased 7.6% in the first quarter, comprised largely of a 5.8% increase in average room rates. Our ADR growth is a result of increases in premium, corporate, and leisure room revenue, and a reduction of discount segments. In this quarter, 23 of our 33 hotels had positive RevPAR.

We see strength in many regions, including the Northeast, Midwest, and Southern California regions. On a hotel-specific basis, our Hilton San Diego, and Doubletree Guest Suites Times Square, Renaissance Orlando, Del Mar Hilton, Hyatt Newport Beach, Kahler Grand, Eugene, Valley River Inn, and Marriott Park City, and Residence Inn Rochester, all turned in double-digit RevPAR growth for the first quarter.

Looking forward at our group business, our current booking pace for 2011 is up 9.2% over 2010 levels. The trend represents a 5% increase in occupancy, and a 4% increase in rate as compared to last year.

During the quarter, commercial transient demand replaced a slight decline in group room night production, which helped drive room rates. From a segmentation standpoint, our 32 Hotel portfolio without the San Diego Hilton, group revenues were up over 3% driven by a 2.4% increase in group room nights. Our transient room revenue was up 6% to last year, with a 6% increase in ADR.

In the first quarter, our revenues from our premium demand sources were very strong, with revenues increasing 17%, ADR increasing 9%, and premium room nights increased 8%. In Q1, our corporate-negotiated room night demand was also strong, with this segment's room revenue increasing 12%, with ADR increasing 4%, and room nights increasing 8%.

Our operators continue to push out lower rated segments resulting in an 18% decline in discounted room nights, while at the same time, they increased the ADR of the discounted segment by 11%.

In general, Sunstone continues to pursue it's strategy of increasing room rates at the occasional expense of occupancy. However, this strategy has not been implemented in all markets, and for all time periods. Our asset managers are working closely with our hotel operators, to maximize hotel revenues and profits, through nimble rate and occupancy strategy shifts, depending on the market conditions.

Food and beverage sales were down slightly year-over-year, as we saw our mix shift from a small decline in banquet sales per group room, effected mostly by decline in local catering, and an increase in F&B sales in restaurants and bars. We expect a similar small decline in Q2, with banquet sales gaining solid strength over 2010 in Q3 and Q4.

During the first quarter, 9 of our 33 hotels were impacted by a renovation displacement, which as Ken noted, resulted in the displacement of roughly $1 million in total hotel revenue during the first quarter, which translates roughly into 50 - 80 basis points of displaced RevPAR growth in 2001 -- in Q1 of 2011.

Our focus is to minimize all lost revenue and disruption, and complete all renovations as quickly and efficiently as possible. Our design and construction team, in close coordination with our assets managers and hotels, have done an excellent job of keeping us on track, and getting the renovations done on schedule, and on budget.

As of this call, we have completed the following projects on time during this year, room renovations at the Embassy Suite Chicago, Marriott Tysons Corner, Marriott Boston Quincy, Marriott Rochester, Marriott Houston North, Doubletree Minneapolis, Marriott Courtyard LAX, Sheraton Cerritos, the Kahler Inn & Suites, and 55 new upgraded executive rooms at the Kahler International.

The renovated rooms completed in -- this just past quarter, represent 1 quarter of our total portfolio's rooms. We completed lobby renovations and Gastro-Bars at the Troy Marriott, Newport Beach Hyatt, Rochester Marriott, and new lobbies at Philly West Marriott, Doubletree Minneapolis, Kahler Inn & Suites, along with fully-renovated meeting spaces at the Philly West Marriott, the Doubletree Minneapolis, the Kahler Grand, and 27 meeting rooms in our Orlando resort.

Our remaining 2011 projects include the master plan renovation of Marriott Long Wharf, the renovation of our Houston Marriott lobby to be completed in mid-June, Houston Hilton rooms and meeting spaces, 64 suites and a new Family Splash Zone at our Orlando Renaissance to be completed in early June, rooms at our Del Mar Marriott, and the rooms at lobby of the LAX Courtyard.

These renovation projects are expected to displace $250,000 - $300,000 of total revenue in Q2. Furthermore, displaced revenues for the entire year are expected to reach no more than $1.5 million, inclusive of the $1 million displacement in Q1. We have already seen nice upside from the renovations at Tysons Corner, Philly West Marriott, and very positive strengthening at Marriott Houston.

Let me now turn to our operating margins. Pro forma property level EBITDA margins for the 33 Hotels we currently own declined by roughly 40 BPS, 40 basis points, while as Kevin noted, margins were up approximately 40 basis points when adjusted for impact to renovations.

This headline figure appears weaker than expected, relative to our RevPAR increase of 7.6%, but is the result of 2 issues. First, our largest hotel, the Hilton San Diego, negatively impacted our pro forma comparable margins to the final phase-in of the hotel union agreement.

We took these higher operating costs into consideration when underwriting the hotel, and therefore anticipated the reduction in hotel margins, which we expect to be approximately 100 basis points in 2011. Second, the renovation disruption just discussed weighed on our first quarter margins, as hotel with rooms out of service became less efficient, and incurred additional costs in discounts.

During 2009 and 2010, our operators took out more than $12 million in costs throughout our portfolio. We continue to work with all our operators to ensure that as RevPAR increases, operating expenses do not creep back in unless significant occupancy increases justify higher costs, and us as asset managers, agree to those increases. With that, I would like to return the call to John to discuss our balance sheet, financial initiatives. John, go ahead.

Thank you, Mark. Good morning, everyone. I would first like to express my enthusiasm to be here at Sunstone. I have known, and respected members of this management team and the Board for many years. And I am very confident, that in working together, we can continue to improve the Company, reduce risk, and maximize our shareholder returns. I am also very excited to work to directly with those of you on this call, our investors and analysts, in this new capacity.

This morning, I will give you an overview of his several topics, including, 1, our liquidity and access to capital, 2, our near-term debt maturities and obligations, 3, thoughts regarding our financial leverage and capital structure goals, 4, details regarding our earnings guidance. And finally, thoughts regarding our disclosure practices.

Let's start with liquidity. Sunstone ended the quarter with just over $214 million of cash, including $153 million of unrestricted cash. Subsequent to the end of the quarter, we raised $111 million of net proceeds from the Series D perpetual preferred offering, and received $40 million in gross proceeds from the sale of the Royal Palm, resulting in an unrestricted cash balance of approximately $308 million.

We then utilized $181 million of our unrestricted cash to acquire the controlling interest of the Hilton San Diego, which currently leaves us with roughly $125 million of unrestricted cash. We intend to use a portion of our sizable cash balance, say, roughly $90 million, to fund the anticipated refinancing shortfall on the $270 million Doubletree Times Square mortgage, which matures in January of 2012. We expect to have this refinancing completed, sometime near the beginning of the fourth quarter.

As of today, Sunstone has $1.694 billion of consolidated debt, which includes the 100% portion of the $240 million mortgage secured by Hilton San Diego. Adjusting for the debt attributed to our minority partners, our pro forma debt balance is currently $1.634 billion.

Following the refinancing of the Doubletree Times Square, Sunstone's near term debt maturities and obligations will be very manageable. In 2012, 2013, and 2014,our debt maturities total roughly $95 million, which includes our only corporate debt, the $63 million remaining exchangeable notes.

Furthermore, our principal amortization totals another $80 million over those 3 years. Collectively, these obligations over the next 3 years represent less than 6% of the total private market value of our portfolio, using various Wall Street analyst estimates of our net asset value.

In addition to our larger than normal cash position, we have access to our untapped $150 million line of credit, have 11 unencumbered hotels that collectively, are expected to generate $34 million of EBITDA in 2011. While we currently see no need to access these additional sources of capital, they are available to us, if we were to hit another bump in the road.

Let me now turn to financial leverage. It probably comes as no surprise to many of you, that our current leverage level is higher than we would like it to be in the long-term. We, as a management team, are completely aligned in our goal to gradually and methodically reduce our leverage, improve our financial flexibility, and reduce our cost of capital.

But let me make this perfectly clear, leverage reduction will not be immediate, nor will it come at the expense of giving away our equity at prices below the intrinsic value of our portfolio. Echoing Ken's earlier comments, we will delever gradually through internal growth, opportunistic debt repayments, and highly equitized acquisitions. But, again, only if the combined transactions add to the intrinsic value of our shares. Given our current liquidity position, our limited near-term debt maturities, and our access to capital, we will be patient on this front.

As Ken also mentioned earlier, we have reinstituted our practice of providing full-year earnings guidance. For 2011, pro forma comparable RevPAR for our 33 Hotel Portfolio is expected to be -- is expected to increase 6% - 8%. Under this assumption, adjusted corporate level EBITDA would be between $204 million - $215 million, and FFO will be between $0.78 - $0.88 per share.

The current consensus estimate of $0.86 per share falls within our guidance, despite the fact that our first-quarter earnings came in below the consensus estimate, due largely to the timing and seasonality of recent acquisitions. On a pro forma basis, our 33 Hotel Portfolio generated 22% of it's full-year 2010 EBITDA in the first quarter, while our first quarter of 2011 is expected to capture only 15% of our full-year EBITDA. Looking forward, we believe the second quarter adjusted EBITDA will account for approximately 27% - 28% of our full-year 2011 adjusted EBITDA.

Finally, let me talk a bit about our corporate disclosure. Going forward, we intend to improve transparency by disclosing additional information about our Company and portfolio.

We have a lot of good news to share. And our management team is highly focused on providing the investment community, the information required to properly evaluate our Company and our performance. With that, I will turn it over to Ken to talk about our strategic focus and direction. Ken, please go ahead.

Thank you very much, John, and again, welcome to the Sunstone team. While Sunstone has made solid progress on a number of strategic fronts thus far this year, we are by no means satisfied with where we stand. In recent months, investors have shied away from Sunstone for a variety of fair reasons, including lingering concerns about volatility in our senior leadership team, our higher than average financial leverage, renovation-related displacement, and a lack of clarity with respect to our strategic direction.

Consequently, despite owning a high quality portfolio of institutional great hotels, which generate superior RevPAR and EBITDA per key, Sunstone trades at a meaningful discount to comparable peer values. We, as a team, have developed and are executing on a business plan aimed at squarely correcting our value deficit through disciplined balance sheet improvement, conservative external growth, operational excellence, and clear, and consistent communications.

We recognize that transforming Sunstone will take time, dedication, and considerable effort. And John, Marc, and I, along with the talented individuals who comprise the Sunstone team, are all fully committed to the task. While we have executed on our year-to-date acquisitions of high-quality hotels at very attractive valuations, these acquisitions were encumbered with higher than target levels of indebtedness. Accordingly, as John noted, over the next several quarters, reducing our financial leverage will remain a key focus.

Under John's financial leadership, we will continue to execute on a measured plan to improve our financial flexibility, by enhancing operational performance, smartly adding high quality unlevered hotels to our portfolio. And by opportunistically paying down certain debt, such as the mortgage on the Doubletree Times Square.

While we are pleased with the continued improvements in demand for lodging and the improved efficiencies we have implemented throughout our portfolio, continuing to enhance our operational performance remains a priority. Under Marc's leadership, we have re-worked our approach to asset management, and are adding key professionals to lead our property level efforts to maximize the long-term value of the portfolio. We, as a team, are working with our operators on a variety of initiatives aimed at challenging unwarranted brand initiatives, and ensuring brand standards are expanded only in ways that will truly add value to our hotels.

Finally, as John noted, without clear Company communications, stockholders cannot make sound investment decisions. We can, and will do a better job of providing you, with the tools you need to evaluate Sunstone.

For example, as I noted earlier, had we provided guidance earlier this year as many of you asked, the factors affecting our full-year and especially Q1 performance would have been better understood by the Street. And consequently, some of the recent disconnect, between our internal forecasts and Street consensus would have been avoided.

As mentioned earlier, we are focused on earning the trust and support of the investment community. And we believe that by providing additional transparency, reinstituting guidance, and meaningfully ramping up our investor relations efforts, we are taking meaningful steps in the right direction. In working to build your support and trust, we will seek to schedule in-person meetings with many of you, in the very near future.

Before I turn the call over to questions, I would like to discuss the innate quality and potential of Sunstone's current portfolio. Our portfolio's characteristics have improved materially over the last several years.

When I joined Sunstone over 6 years ago, our hotel portfolio primarily consisted of small, mid-size hotels in secondary and tertiary markets with an average RevPAR of $69, and an average size of just 240 keys. We now own a 33 Hotel Portfolio that consists of institutional quality, well-located, upper upscale assets, with an average size of 408 keys, and which generated an average RevPAR of approximately $115 during 2010.

The majority of our earnings are generated by large, high quality urban hotels, including the 1,190 room Hilton San Diego, the 870 room Renaissance Washington DC, the 412 room Marriott Boston Long Wharf, and 920 rooms we have in the heart of Times Square, in the form of the Hilton Times Square and Doubletree Times Square, which as Marc mentioned, we are rebranding as the Hilton Suites Times Square.

Our pro forma adjusted corporate EBITDA for the trough year of 2010 was north of $200 million. As a point of reference, 2007 peak RevPAR and hotel EBITDA for our current 33 Hotel Portfolio were $134 million and $315 million, respectively.

Based on our current stock price, our portfolio trades well below market comps, at just over $200,000 per key. As industry fundamentals continue to strengthen, knowing that Sunstone's margins in 2010 were more than 200 basis points higher than the margins achieved on a same-store basis during the 2003 trough, our portfolio has the potential to meaningfully exceed prior peak performance levels over the next several years.

Going forward, our objectives are clear, and our strategy is simple. We as a team are highly confident in our ability to unlock and drive significant value above current levels, through the disciplined execution of our balanced business plan. With that, let's open up this call to questions. Operator, please go ahead.

Thank you, sir.(Operator Instructions).Our first question comes from the line of Ryan Meliker with Morgan Stanley. Please go ahead.

Hello, gentlemen, and John, welcome to the other side of things.

Thank you.

A couple of -- a couple quick questions here, really surrounding the Hilton Bay front. I guess first is, can you give us some color on -- how your demand mix is shifting, either for 2011, or maybe where you're expecting to go, now that bought this big group oriented hotel And then also, maybe some color on group-based, across your portfolio in revenue and rates? Thanks.

Ryan, this is Ken, I apologize, you're very garbled in your request, and it sounds like you're asking for shift in the Hilton Bay front?

I was just wondering if the demand mix across the portfolio has shifted? Can you hear me better now?

Yes.

Okay, great -- if demand mix has shifted across your portfolio after the acquistion of that larger group-oriented hotel, and then, where group rooms is looking for 2011, in terms of rate and revenue?

Sure. We won't get to specifics on the San Diego Hotel, but I can tell you that our segmentation has certainly shifted over time. In 2009, for example group rooms comprise about 29% of our demand. They are now at about 33% of demand, so it has certainly shifted over into more of a group orientation. Transient, is comprised primarily now of business transient, whereas over the last couple years that business transient section -- segment, which is the highest rated segment, had been a lower percentage. So you are seeing a shift within that transient segment, as well into the higher rated areas.

Is that 33% group that you are seeing now, where you guys want to be, or are you hoping to see that change over time?

I think with the existing portfolio, you are going to see group continue to expand as a percentage of our total demand base. We can certainly see it reaching the 35%, 36% level. Ultimately, though our portfolio is primarily business transient-oriented. So while adding group hotels is certainly a facet of our planned, also driving business within that transient segment from the lower-rated leisure and government contract segments into business is also a key focus item.

Sure. And then, any color on your portfolio revenue pace from the group segment?

Portfolio revenue base in the group segment, in terms of pace?

Yes, the pace -- the whether it be volume, rate, or combination.

Sure, well, pace trends are looking very good. We are up about 9% at this point, and that is split pretty well between -- it's about 5% in rooms, and about 4% in the rate at this point.

Great. That's helpful. And then just one last real quick question. You mentioned the 2007 peak EBITDA in RevPAR of you current portfolio was $134, and $315 million. If I recall correctly 2007 was when the Hilton Bay Front opened. So is it safe to assume that a more stabilized Hilton Bay Front, [revealed] at a much higher peak level?

That's actually a very good question. Now we've tried to factor for what would have been a pro forma number for that hotel, had it been open in 2007. I'm glad you asked that question, because the 134 and 315 does factor for -- a kind of our estimate of the run rate potential for that hotel.

Great. Thanks a lot. That's all.

You're welcome.

Thank you. And our next question comes from the line of Ian Weissman with ISI Group. Please go ahead.

Yes, good afternoon or good morning. Maybe you could talk a little bit more specifically about deal pipelines. Obviously you hired Robert to come and head acquisitions. What are you seeing in the marketplace today, and are REITS clearly at the same advantage as they were in the past?

Sure, Ian. How are you today. The deal pipeline continues to be very robust. As you know, from the three transactions that Sunstone has closed on thus far this year, we are highly focused on quote, off market transactions. And I say quote, because obviously in an efficient market, there is really is no, off market deals. But we are really focused on leveraging our relationships, and getting out there and acquiring hotels where we can add value to current ownership in an un-marketed format. And so those continue to be the types of transactions we look for. Again, the deals that we've done thus far this year, total in value roughly $900 million, and they were acquired at -- at an EBITDA multiple inside of 14 times, on a trailing basis. Those are the types of deals we look to continue to do, and we do think there's -- those opportunities exist.

Can you remind us again, where your unlevered IRR targets are?

Sure. We think our weighted average cost to capital is in the high single digits, and we look to an unlevered basis to achieve returns that are 100 basis points to 400 basis points in hurdle above that.

And finally, you talked about potential for reinstating the dividend this year. Can you maybe talk about timing and level?

Sure. John mentioned that we're likely to generate positive taxable income to our common shares during the course of this year. We had our Board meeting this week, and during that meeting we decided that we would make a decision on the timing of the dividends in our August meeting. So you can expect a great deal of additional extra color on that, in our next call.

Okay, great. I'll yield the floor. Thank you.

Thank you. Our next question comes from the line of Eli Hackel with Goldman Sachs. Please go ahead.

Thank you. One question on leverage levels. Can you give more detail on leverage levels that you are comfortable -- maybe not just now, over the next year, but leverage levels that you are really comfortable with long-term, i.e., maybe going into another down turn, however long you think that is from now, and how you adjust [EBITDA now] to adjust your strategy for the next, not one year, but two years or next three to four years or whenever the next recession comes? Thanks.

Great, Eli, really good question, because I think discussing our credit strategy really does require a long-term focus in terms of timing. I am going to shift the call over to John here, to walk you through some of the specifics, but the general objective here is to continue to improve our coverage and reduce leverage over the next three or four years, to get to the point where, if we are at the peak of a typical cycle, we will have a great deal of financial flexibility, going into the trough. So why don't I shift it over to John to give you more specifics on how we obtain those objectives, and what we believe those objectives -- the attainment of those objectives will bring to the Company.

Eli, John Arabia here. When determining our -- the leverage levels that we would really like to drive to long-term, the way we are thinking about it is, we want to be able to have access to multiple forms of capital at the trough, when that next trough comes. We don't know exactly when it will come. We are hopeful that we have a long run in operating fundamentals over this next cycle, but I think history has proven that those cycles eventually play out. And we have just gone through two very significant downward cycles. Where we as a management team would like to position our capital structure is, that we can not only survive but operate our day-to-day business including funding capital expenditures. But also at that point in time remain able to go on offense.

And so, longer term, the way that we are looking at internally, is we would like to get to a leverage level where if we witness an earnings decline like we witnessed over the past two cycles, let's call it 40%, 45%, which again were considered anomalies, that we would be able to again go on offense. That is a fairly low debt to EBITDA number, and it's going to take a pretty active balance sheet management, albeit very disciplined. I just want to reiterate the point that the goal here, is not that reduction, the goal is improving shareholder value, and so we will do this -- on a step-by-step gradual basis. Does that answer your question?

Yes. And maybe just a follow-up to it. So does that mean it will be more in the -- that if you guys are doing acquisitions, it will be just very high equity values, or you think you will just do one-off equity raises just to straight out reduce leverage?

It's hard to --

This is Ken. Let me jump in, because I think your question was a very specific one. We will not be raising equity simply to pay down debt. John and I both outlined in comments that there are three means to reducing our leverage over time. And John said it exactly right, this is going to be and a measured disciplined approach. The three goals our number one, focusing on operational excellence and improvement. Number two, funding acquisitions much more highly with equity, but not raising equity to pay down debt. And then number three, opportunistically using our excess cash balances to repay a portion of debt as we are able to. For example, our plan calls for a partial pay down of debt on Double Tree Times Square later this year, as we embark on that refinancing.

Great. That's really helpful. Thanks, guys.

You're welcome, Eli.

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

Hi. Good morning, guys, Actually, most of my questions were answered, but I just missed one of your three points that you were just saying, Ken. You talked about operational improvements, pay down debt, and what was the third?

Well the third one would be that we will to look to acquire hotels that are additive to portfolio of quality and growth profile, in a way that also benefits credit metrics. And so what that means in simple terms, is that we will look to acquire a hotels using more equity than debt.

Okay. If you can explain that, using more equity than debt? (Multiple speakers).-- that you're almost out of cash?

Correct. So we would look to fund our acquisitions -- basically, match fund to equity raises, with additive acquisitions.

Okay. So you would raise equity to make acquisitions, not to pay down debt?

That's correct.

That's the clarification I needed. Thanks a lot.

You're welcome, Dennis.

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

Hi, good morning, guys, and congratulations, John.

Hi, thanks, Chris.

I want to ask you on the Doubletree Times Square, can you maybe give us again, some direction, in terms of the ADR or maybe the RevPAR lift that you expect from that next conversion to the Hilton Suites?

Sure. I'll turn this over to Marc for that, as he has done a lot of work on the project. We aren't going to be able to give too much, in terms of specifics, but we're excited about the impact of this project. So let me just shift it over to Marc.

Sure, thank your Chris. In general, obviously the Doubletree currently runs significantly high occupancies in the mid- 90s, is the number one in that entire set. But even with that, [Hygate] who you know runs that hotel, and also now runs our Hilton Times Square hotel, really has superior intel in the market, they provided us with. And we strongly believe that there is upside, particularly by changing the brand to Hilton, what you will do, is there are significant amount of Hilton other customers, that we believe will be willing to pay a premium, a slight premium. We think there is a premium at ADR, in range of $8 to $15 --in that range in terms of the switch, once we get that done. And we will be doing the work approximately post January in 2012. Also, of the international clientele, really does see Hilton as a much more of a buy. We have a very large international potential market in that entire area.

Sure. I guess, John, that signage revenue from that, does that just go into that other hotel revenue line?

Yes.

Okay, great. Also, I want to ask you about that earn-out feature on the Royal Palm Miami. Can you share with us where the hotel is, with respect to those hurdles, and how long does that earn-out extend?

Sure, Hi, Chris, this is Ken. The earn-out is perpetual earn-out, so obviously, we're not in the money, in earn-out at this point. But the Royal Palm being a repositioning and renovation project is going to realize it's value on the back-end of that renovations. So you're likely to realize that on sale.

Okay, great. And then finally, on the San Diego Bay Front, can you -- and I don't know if you guys have the information. But relative to where you think this might have been underwritten when it was built, in terms of a RevPAR number, do you have any sense as to where we are, in terms of the ramp up?

Sure, certainly, against pro formas, the hotel is out-performing. And I think that is probably a unique claim, as far as a hotels that were built during that time period. It was built very well, and in a market that needed that product. So it's outperforming underwriting, and we are excited about the pace going forward. It is the number one asset in the San Diego market.

Okay. Very good. Thanks guys.

You're welcome, Chris.

Thank you. Our next question comes from the line of [Enrique Torres] with Green Street Advisors. Please go ahead.

Good morning, guys.

Good morning, Enrique.

Could you comment on if you have seen any operating impact from Sales Force One, if it has been a net positive, or negative, and what are you projecting, in fact, to be going forward?

Hi, Enrique, I will take this, and then I'll shift it over to Marc. That's a very good question. As I noted in my comments, and Marc, echoed, we as a team are very focused on analyzing and challenging brand initiatives, and I think Sales Force One is a fairly new initiatives. With any new initiative, that is as sweeping and as ambitious as this one, you are going to see some turbulence and some growing pains. Marc is going to give a little bit more detail here, but the short answer is, the jury is still out.

Enrique, Marriott is still the number one driver of group rooms. In North America, their ability to drive group rooms is still number one. I would tell you that we will continue to work with them. And I was recently in Washington last week going hotel by hotel with the highest level of salespeople, and the highest level of people in the Marriott. And we are confident particularly with their flexibility and openness to our feedback, that we will continue to see improvements.

Okay. All right. That's some good color there. And a follow-up question, on the dispositions you mentioned, or capital recycling initiatives, can you provide a little color on, not what assets specifically, but perhaps what types of assets within your portfolio, you would be looking to target there?

Sure, Enrique. This is Ken. We had some capital recycling earlier this year with the Royal Palm, where it was a non-conforming project. There are other legacy assets in our portfolio that don't fit the mold of the assets that I described on the call, as high quality institutional assets in primary markets. Our top ten hotels generate 66% of our EBITDA. So we really want to focus on owning a portfolio that is comprised of larger institutional quality assets. So if you look at the map on our website, I am not going to name names, but you can see certain assets that would qualify as mid-term sales candidates. And so stay tuned on that. In the interest of not disrupting operations or distracting the team from the focus of running the hotel to the max potential, stay tuned, and we will let you know if there's any dispositions in our future.

That's helpful. Thank you.

You're welcome.

But no questions for John? (Laughter).

I will take it easy on him this time.

Thank you, Enrique.

Thank you. Our next question comes from the line of Shaun Kelley with Banc of America. Please go ahead.

Good morning, guys, and welcome on board, to John and Robert. I wanted to talk real quickly -- if we could go back, I mean Ken, now with the acquisition of additional interest in the Doubletree Times Square. And New York and DC both had a little weather issues in the first quarter, could you -- I don't think you broke it out in the release, and I apologize if I missed it at the beginning of the call, any sense of how much that impacted you in the first quarter? And what you are seeing particularly in New York and DC, since they are some big hotels for you now?

Let me shift it to Marc. We did break out regions in the press release, but Marc can give you more specific information about those.

Sure. I know some of the other REITs talked about the Northeast -- I mean overall we did have some impact in occupancy. I don't think we calculated it down to specific percentages. But we did take some RevPAR decline in those same weeks, similar to a [Diamond Rock] and those types of things. We did not feel it was meaningful enough, that we really needed to call it out.

Okay. That's helpful. And then, secondarily, I want to ask about the kind of -- the acquisition strategy going forward. Thinking about the Royal Palm, and obviously that was a bigger repositioning story. You guys had made a decision to move away from that. So, could you just walk us through, what you think is going to be different about the way the Royal Palm kind of process went through, versus what you are going to be looking at -- looking for next, as we think about the difference in that deal, and the difference in the kind of go forward deals, and where Robert maybe comes in on that front?

Sure. Good question. It's pretty simple, and somewhat boring, but our focus now is to acquire institutional quality assets with the in-place EBITDA, that are well-located in primary markets, that have more than 350 keys, that generate in-place trailing RevPAR that's additive to the pro forma of our portfolio, which was $115 last year. Branded, and while we certainly can and do look at value through our design and construction function and asset management function, we are looking for projects where we can add value on the margin, without doing deep, deep dive repositioning at this point. And ultimately, once we grow the Company, and build up the portfolio over the next several years, we will certainly take on more of those deep dive accretive value add initiatives. But the first order of business is to focus on middle of the fairway, institutional quality assets that are branded.

And maybe -- this will be my last question. As you kind of think about pricing in some of the markets -- we obviously continue to see some pretty big headlines price per key numbers coming out of New York, DC, San Francisco. So do you think the strategy, kind of what you talked about there, Ken, in terms of RevPAR, premium to the portfolio -- can you still -- can do that in? I mean, would you look for markets outside of maybe the big three or four at this point? And how do you think about kind of weighing that, versus this pound for pound, you might get something that checks a couple of those boxes but you are going have to pay a really low cap rate to get in?

Sure. We look -- we are certainly not married to the top three markets. We acquired New Orleans, for example, earlier this year, which is a terrific asset, very well -located, fit all of our parameters, and it's I guess, a top 30 market, if you really want to break it down. So we are not at all adverse to looking at sort of the top markets. And in fact, that's one of our strengths, is rather than going to marketed channels in competing with all the other players on some these high profile deals, we are going out and spending time in those top 15 to top 30 markets, looking for the right assets that fit our profile. And those deals can be done as we demonstrated -- and the three deals that we closed thus far this year at far better valuations than the marketed deals.

And just one last one that I thought of, but Houston was a drag with some group business, that I think had been changing out there, or some contracts that you guys had lost. But with oil kind of coming back as quickly as it quickly as it has, barring yesterday's drop, obviously. Does that provide a tailwind there? Are you seeing any improvements in Houston and above and beyond, what you expected because of the disruption from the contract loss?

Yes, good question. Obviously, the contract loss was we had KBR in the hotel for several years. And the hotel did superior during that time frame. We now have completely refocused the hotel, both from rebuilding two sales teams, to spending considerable capital to position hotel. RevPAR at our Houston hotel was down approximately 7.8% to last year in Q1. Although down on a year-over-year basis, we meaningfully beat our budgeted expectations in Q1 by 12%. As the hotel experienced an increase in transient group bookings, we've continue to see strength. If this trend continues forward, which we think it will, we could see year-over-year RevPAR increases earlier than previously expected. The Houston Marriott will see positive RevPAR in Q2, while the Houston Hilton will see positive RevPAR growth in Q3. And for full-year forecast we expect both hotels to have RevPAR growth, albeit slight growth for 2011, which is significantly better than we were before.

That's great. Thanks guys.

Thank you.

Thank you. Our next question comes from the line of David Katz with Jefferies & Co. Go ahead.

Hi. Good afternoon, all.

Good afternoon, David.

Or good morning, wherever you are. I apologize, I have been sort of on and off a bit. But during some of the commentary, we were curious about the margins that were sort of clean, stripped away for same-store and as well for construction. And I believe the commentary reflected two reasons one of which was a union cost that occurred. And would you mind revisiting what that second reason was? I'm not sure I was clear on it, please.

Sure. The margins were a product of complicated set of factors. First of all, the data point that we offered up was, that adjusting for renovations for our margins would have been up about 40 basis points.

Right.

One of the big factors in our margins this year, because our pro forma numbers include the prior year, the Hilton Bay Front current year, the Hilton Bay Front has it's full union wage scale in place this year. That was, obviously underwritten by us, when we acquired the hotel, but it resulted in a lot of noise in the year-over-year comparison in the margins. Beyond that, you've also got a shift over in wages and benefits across our portfolio, which were up slightly, actually in the low teens. And in fact, slightly higher than that, in a number of our hotels, so wage pressure certainly was, accounted for throughout our portfolio. A portion of that, and a portion of the cost pressure at the property level was also related to bonus accruals, and so on as the hotels continue to ramp up in performance. We incent our operators through financial bonus metrics, and so it was a positive indicator of the performance of our portfolio, you are seeing now bonus metrics creep into the scheme. Marc, do you have anything else to add on that?

Yes, just a few other items. Our Q1 2011 hotel EBITDA margins for the 33 Hotels were 23%, down 20 basis points to last year. Excluding the hotels under renovation, our margins would of been up 40 basis points. Ken talked about a few of the other items that were involved with that. And in addition, the two Houston hotels, again, continued to negatively impact us in the first quarter. We expect that negative impact from the Houston's to diminish during the second part of the year. As I've talked about a moment ago, as RevPAR continues to improve there.

Okay. If I can just follow-up that up for a moment, Did you say -- are we clear that some of these issues will carry through into the second quarter, and through the rest of the year? Because I think one of the themes that has come across, from not only you all, but from others in your category, is that we are looking at a ramping, and a back end loaded year, which I guess, introduces an element of risk to estimates. And we want to make sure that we are properly reflecting any impacts in 2Q, 3Q, that we should?

We don't see it as being, a fully transferable into the second, third and fourth quarters of this year. And another thing that hit margins in the first quarter was that -- 100% margin business, in the form of attrition payments were significantly lower in the first quarter. We think that will moderate out during the course of the year. And we think that the more important point with respect to our portfolio, is the efficiency level that it's currently running at. So while the year-over-year comparisons may be more moderate than we would have liked in the first quarter, the absolute performance, in terms of margin is pretty impressive. As I noted in my comments, we're 200 basis points higher than where our same-store portfolio was running at the trough of the last cycle.

Got it. And one last one on that issue. Many companies have talked about New York, and it's impact on their portfolios to varying degrees. Why is it, or should we consider New York isolated to 1Q, or is that an issue that we expect to pervade the rest of the year?

Let me take a bit of that one, and then I am going to give it over to Marc. On a pure economic standpoint, in terms of supply and demand, we have seen some supply additions in New York, and they continue to increase above the historical average. But that's really a broader New York issue. And you have got to think of New York as a very pluralistic market. Our presence in Times Square core market, the 920 keys that we have are on the corner of Main and Main. So when you look at the supply impact from broader New York market, those certainly are noteworthy. But we look at our hotels is being highly protected in their current locations. Marc, do you want to add anything to that?

Sure. Our key hotels, our combined Q1 RevPAR growth of 8%, which is significantly higher than Manhattan tract, as you will know, and significantly higher than the mid Manhattan tract. The Hilton ran 85% occupancy, the Doubletree 92.3% for the quarter. Our preliminary numbers for the month of April show the hotels running a combined RevPAR north of 12%. We will continue to watch supply, work closely with [Hygate], but believe that we own the best-located hotels in the market. And feel the impact of those two hotels will be less, because everything emanates from Times Square out. And we still feel pretty solid about, particularly with our results being so much more than the tract.

Got it Okay, appreciate the guidance and disclosure and strategy and all. Good luck. Thanks.

Thank you.

Our next question comes from the line of Bryan Maher with Citadel Securities

Thanks. Can you guys hear me?

We can. Hi, Bryan.

Hi, guys, thanks a lot for the enhanced disclosure, that's a real big help. I guess my question is bigger picture, and kind of follows a little bit from David's questions, and it really relates to RevPAR. Pretty much the party line for all the companies that have reported, is this 6% to 8% for the year. But on the back of that, many of the companies kind of came up short in the first quarter. So based upon the kind of tepid economic recovery, high unemployment, commodity prices, and the kind of slowing of occupancy growth, can you kind of handicap, how you feel about that 6% to 8% RevPAR growth forecast?

Sure, Bryan. Let me jump on this one, and once again, I will shift it over to Marc to give you the actual facts. But our current projections would indicate that RevPAR, given our pace trends, given our forward bookings, etc., is likely to perform call it -- 7% or 8 % in the second quarter, significantly higher, just based on comps more than anything in the third quarter, in the higher single digits. And then back down, to kind of that 7% or 8% in the fourth quarter, is how we're currently projecting things out. But again, that is substantiated by our property level build ups Marc, do you want to add anything?

I mean, look, I think that your comment is a fair comment, about what happens with the economy, and where we go. I mean I think at this point, that's why we've given the range of 6% to 8%. The good news is that the pace that we have on the books is 9% ahead. And the two [B's] that we need to book in our hotels for the remainder of the year, while is a reasonable number, it continues to fall, as it should be as we move to the out months. So again, I think the range is appropriate. Q1 is a softer quarter in general, around the country for -- and which is why you heard, what you heard from most of the comps set of the REITs.

Thanks a lot.

Thanks, Bryan.

Thank you. Our next question comes from the line of Michael Salinsky with RBC capital markets.

Hi, good afternoon, guys, and welcome aboard, John. First question, since you gave guidance, just curious if you'd walk through kind of the sources and uses, specifically, CapEx spend that you guys budgeted in the guidance for 2011, as well as what you are kind of assuming, in terms of the debt pay down, and what you anticipate for end of the year cash balance?

Sure. This is Ken. I'll jump in for this one. Our CapEx forecast for this year, for the full-year is roughly $100 million to $120 million. We did about mid 30s in the first quarter on CapEx, and completed a number of projects as Marc mentioned. As far as debt reduction in the course of the year, it will come in two forms, amortization of roughly $20 million. And then we do expect to pay down a portion of the Doubletree Times Square loan at the end of the year or in the fourth quarter. We think that pay-down will be roughly $90 million. We don't have specifics at this point. We would expect to end the year with cash. We do want to have a little bit more efficient cash position to end this year, and so we would expect in the year with cash in that $40 million to $60 million range.

That's helpful. I don't know if you mentioned this in your prepared comments, but did you give the RevPAR for April for the portfolio?

We did not. Bryan, hold on Mike, and we'll pull that together for that group.

Hi, Mike. Just a follow-up to Ken's comments. Remember, we are moving into the period of the year where we will be generating more and more cash from operations, as opposed to the first quarter which is fairly light in that regard.

That's helpful. Just a follow-up to Enrique's question too, while we are waiting here. You talked -- he asked about asset recycling and I'm curious if you guys are actively marketing any properties right now?

We are not actively marketing properties right now. We have got -- we are certainly entertaining inbound calls on a number of properties every once in a while, but we do not have acted active marketing efforts. And to answer your question about RevPAR for April, our portfolio was up about 5.5% across the board.

Great. That's all for me guys. Thank you.

Thank you. And our next question is a follow-up question from the line of Dennis Forst with KeyBanc.

My timing was perfect cause I was going to ask about April RevPAR. Does Easter falling in April have an impact on that 5.5% number?

Yes. That's correct. Yes, makes it a little bit lighter in our business hotels.

And that April number includes all of the properties that you currently own, the 33 versus the same 33 a year ago?

Yes, that's 33 versus 33.

Okay, and then lastly, I'm wondering about your thoughts on limited service hotels? There has been a lot of talk by investors about limited service hotels. You've got a Residence Inn, you've got a Courtyard but it certainly was not in your dialogue, Ken, about looking forward.

Yes, Good question, Dennis, because we certainly don't want to box ourselves in with specific brand names. We like urban upscale hotels, in top markets. We would certainly consider an urban Courtyard for example, or an urban Hilton Garden Inn, to fit within our target profile in the right markets, in the right locations. So you can see a limited occurrence of us investing in those types of assets, but primarily we are looking at upscale properties.

Yes. And limited would only be in the top five, ten market? Where you could get a very high rate?

Correct.

Got you. Okay. Thanks.

Thanks, Dennis

And there are no further questions in the queue. I would like to turn the conference back to Mr. Cruse for any closing remarks at this time.

Great. Well, hank you everyone for participating on the call. We look forward to speaking to you later in the year in our intra-quarter update. And we also look forward to meeting with many of you over the next several weeks at NAREIT NYU, or at several road shows that we talked about pulling together. So thank you.

Thank you. Ladies and gentlemen, this concludes the Sunstone Hotel Investor first quarter 2011 earnings -conference call. We thank you for your participation. You may now disconnect.