Sunstone Hotel Investors Inc (SHO) 2011 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Sunstone Hotel Investors Second Quarter 2011 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions.

(Operator Instructions)

As a reminder, this conference is being recorded today, Monday, August 8. 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.

Good morning and thank you for joining us today. By now you should have all received a copy of our second quarter earnings release, which was released this morning. If you do not yet have a copy you can access it on our website at www.sunstonehotels.com. As you may have noticed, in addition to our scheduled quarterly release, we are also providing additional disclosures including property-level operating statistics. This additional disclosure can be found in the Investor Relations section of our website, also.

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 and Chief Executive Officer; 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 will now turn the call over to Ken. Ken, please go ahead.

Thank you, Bryan. And thank you all for joining us. Today I'll cover 3 topics, including our second-quarter performance, our outlook for the remainder of the year, and Sunstone's now-completed leadership transition. After that, Marc will cover operational details, and John will review our finance initiatives, as well as our new supplemental disclosures. I will then conclude our prepared remarks before opening up the call for your questions.

Obviously, increasing global economic concerns, as well as the recently highlighted need for near-term stimulus and meaningful long-term fiscal reform in the US have generated significant turbulence in the markets. While these macroeconomic concerns have taken their toll on individual stock values, we have not seen a direct translation into slower business trends in our hotels.

In fact, as evidenced by our second-quarter performance and our July results, we continue to see robust demand trends across our portfolio. Moreover, our liquidity position remains very strong. Our debt maturities are well staggered, and our business plan is oriented toward fiscal discipline and operational excellence. Accordingly, we are well-positioned for the current environment.

Moving to our second-quarter results. For our comparable portfolio, second-quarter RevPAR rose to nearly $132, an increase of 7.2% over the second quarter a year ago. Our solid RevPAR growth was driven by a 4.1% increase in rate, and a 3.1% increase in occupancy.

Transient business trends in particular were strong during the quarter and generally offset isolated instances of weakness in group demand.

Our Q2 performance was further enhanced by strong growth in our recently renovated hotels, and a corresponding decline in renovation disruption as we completed the majority of our 2011 renovation projects, including rooms renovations at 9 of our hotels during the first or second quarter of this year, leaving only a handful of ongoing projects throughout our portfolio.

Quality renovations and proactive asset management are leading to improved market penetration as measured by our composite Smith Travel Research RevPAR Index, which we refer to as our star index. Our star index increased nearly 100 basis points in the second quarter. Penetration was particularly strong in June, with our portfolio gaining 230 basis points in star index. Going forward, continued market share growth remains a core asset management focus.

Operational efficiency is also a core focus of our asset management team, which helped to drive meaningful flow-through during the quarter. Specifically, in the second quarter we retained $0.76 in EBITDA for every $1 in incremental revenue our portfolio generated. As a result of this exceptional profit translation, our same-store hotel EBITDA grew by nearly 17% over the same time last year, and we attained hotel EBITDA margins of approximately 31% in the quarter, an improvement of 280 basis points over the prior year.

Our margin performance during the quarter did benefit from successful real estate tax appeals at our Embassy Suites Chicago and our Fairmont Newport Beach. Excluding these tax benefits, pro forma margins were up approximately 240 basis points and our same-store hotel EBITDA grew by 15% as compared to the second quarter of 2010.

We are very pleased with our year-to-date acquisitions and the effect that they have had on our portfolio quality and performance. We've worked extensively with the team at the Hilton Bayfront in San Diego to identify and implement new profit opportunities which help the hotel to generate better than 6% RevPAR growth, and higher than underwritten margins during the second quarter, which were expected to decline versus last year as a result of pre-existing contractual wage adjustments.

Our Doubletree Times Square generated 360 basis points of margin expansion on nearly 15% growth in RevPAR, and our JW New Orleans generated 790 basis points of margin expansion on better than 16% growth in RevPAR.

Current transient demand remains strong throughout our portfolio, and we continue to see a healthy increase in mid-week compression. So far in the third quarter, our portfolio revenue growth is accelerating, with July RevPAR up 11% as compared to July 2010. This is our most current and relevant indicator of the growing strength in demand across our portfolio.

While demand continues to show resilience given the typically high correlation between hotel demand and the broader economy, we believe caution is warranted in projecting business trends for the remainder of the year. Accordingly, in spite of our stronger-than-expected second quarter, we are maintaining our prior guidance for 2011, with a slight adjustment for the effect of a pending sale of the Eugene Valley River Inn.

To reiterate, we expect comparable RevPAR to increase between 6% and 8% over 2010. This applies adjusted corporate EBITDA of between $203 million and $214 million, and adjusted FFO per share ranging from $0.78 to $0.87.

Looking ahead, despite the recent turbulence in the stock market and well-founded macroeconomic concerns, industry fundamentals remain constructive, and we generally believe that the long-term hotel recovery will continue at a moderate pace. We believe an environment in which demand continues to grow at a moderate pace, interest rates remain very low, and supply trends remain muted would be very favorable for our business model.

Shifting to portfolio management, today we announced our intent to sell the 257 room Valley River Inn in Eugene Oregon. The hotel is encumbered by approximately $11million of mortgage debt, and was expected to generate approximately $1.7 million of EBITDA in 2011. We will provide specifics on the sale of this hotel later this year, and we will continue to evaluate other assets for potential sale during the third and the fourth quarter.

Finally, with respect to our team, we've now finalized our leadership transition and Sunstone's Board of Directors has appointed me to the position of Chief Executive Officer. I thank our Board of Directors for their confidence in making this appointment.

This effectively concludes the transitional period that began last December, during which Bob Alter and I served as co-leaders at Sunstone. I truly thank Bob for his exceptional support, teamwork, and mentorship during this transition period. During this period, we closed on nearly $900 million of attractively priced, high-quality hotel acquisitions. We sold the Company's Royal Palm project at a nice profit. And most importantly, we assembled an exceptional team to lead Sunstone's next era.

It is my privilege and honor to have the opportunity to lead such an outstanding team. We have meaningfully deepened our talent base, streamlined our team structure, redefined our corporate culture, and clarified our direction.

Sunstone is now characterized by a system of leadership that is collaborative, quantitative, strategic, and disciplined. Going forward, I have absolutely no doubt that through our combined efforts and dedication we will achieve our core objectives of superior operational performance, lower leverage, and meaningfully improved investor understanding of our portfolio and business plan.

Transparency will be a hallmark of Sunstone going forward. Accordingly, we have introduced a significantly expanded investor disclosure package this quarter, which John will discuss in detail in a moment. I'll now turn the call over to Marc Hoffman to discuss our portfolio operations in greater detail.

Thank you, Ken, and good morning everyone. Thank you for joining us. Today we will review our portfolio's second-quarter operating performance, an update on our recently completed, and our in-process renovations, and review some of our new asset management initiatives.

All hotel information discussed today, unless otherwise noted is for our 32-hotel portfolio, which includes on a pro forma basis all 2011 acquisitions, Doubletree Guest Suites Times Square, the JW Marriott New Orleans, the Hilton San Diego Bayfront, and excludes the Royal Palm and Eugene Valley River Inn.

As indicated, pro forma RevPAR increased 7.2% in the second quarter, comprised of 4.1% increase in average room rates and the 3.1% increase in rooms sold. Our ADR growth is a result of increases in premium, corporate, and leisure room revenue, and a reduction of discount segments. In this quarter, 28 of our 32 hotels have positive RevPAR, with 15 of those hotels generating double-digit growth.

For more detailed information, please reference pages 25 and 26 of the enhanced supplemental information provided in addition to this quarter's release.

We saw positives in many regions, including the Northeast, Midwest, and Southern California.

Looking at our group business, our booking pace for 2011 is up 6.3% over 2010 levels. This represents 3.6% increase in occupancy and 2.6% increase in rate, as compared to 2010. Full-year 2012 group pace is down 3.5%, driven by a decline in room nights resulting from a weak convention calendar in Washington, DC, due to the election year, as well as a weak calendar in Baltimore. 2012 full-year pace without DC and Baltimore Renaissance hotels is up 6.4%, with 3.8% growth in rooms and 2.5% growth in ADR.

We are focusing closely with our managers on group room night production, the total number of group room nights booked in the quarter for the current and all future years. In Q2, our 32-hotel portfolio production was down 4.7% compared to Q2 last year, hampered by our 2 large Renaissance hotels in Washington, DC, and Orlando. Without these 2 hotels, group production for the quarter was actually up 7.3%. DC, as most of you know, has softened up this year and is facing a difficult 2012, with city-wide room nights down 30%.

From a segmentation standpoint, Q2 group revenues were up a strong 8.5%, driven by a 6.3% increase in group room nights. Our transient room revenue for Q2 was up 6.9% to last year, with a 5.1% increase in ADR.

In the second quarter, our revenues from our premium demand sources were strong, with revenues increasing 14%, ADR increasing 5.4%, and premium room nights increasing an impressive 8.1%. In Q2, our corporate negotiated room revenues increased 2.5%, with a 3.2% decrease in rooms and nearly a 6% increase in ADR.

Our asset managers are working closely with our management operators on a weekly basis to maximize hotel revenues and profits through nimble rate and occupancy strategy shifts, depending on the changing market conditions.

Our portfolio showed very strong flow-through performance, as well as solid EBITDA margin increases during the second quarter. We continue to work with all of our operators to ensure that as RevPAR increases, operating expenses do not creep back in unless significant occupancy increases justify higher costs, and we as asset managers agree to those increases.

This strategy is a key driver to the successful quarter, as many of our hotels are aiding our increases and were successful in controlling their expenses with the revenue increases. This strategy was highly successful at the Kahler Grand, the JW Marriott New Orleans, Marriott Portland, and Chicago Embassy Suites, just to name a few.

Another contributing factor to the hotels' expense improvements is the ongoing gastrobar concept, which improves the F&B profit margins by combining 2 outlets, 1 of which is the restaurant, most likely losing money, into an efficient, profitable single outlet. Gastrobars have been successfully implemented now at the Troy Marriott, the Hyatt Newport Beach, the Houston Marriott, and most recently, the Long Wharf Marriott.

Our Houston hotels are beginning to see improvements this year, as they have substantially completed their renovations and repositionings, and offer a competitive product.

The Houston Marriott is beginning to see an easier comp as the large piece of contract business has been out of the hotel for a full year. And the hotel is beginning to see a lift from its complete rooms and lobby renovation. Hilton Houston is expected to see an easier comp starting in Q3 in conjunction with the completion of the rooms and meeting space renovations.

We are also implementing best practices across our portfolio, and specifically to our newly acquired hotels. As a result, we believe that our recently acquired hotels will exceed our initial underwriting, absent any significant decline in the economy. Our continued automated parking initiative is continuing to see success, as seen by the improved profitability at the Marriott Quincy and Marriott Tysons Corner, as we installed those parking systems this year.

Our real estate tax theme successfully achieved prior-year real estate tax refunds at the Chicago Embassy Suites and Newport Fairmont during the quarter, which also benefited margin performance. During the second quarter, 5 of our 32 hotels were impacted by renovation displacement, resulting in the displacement of roughly $500,000 in total hotel revenue. This translated roughly into 30 to 50 basis points of displacement RevPAR growth in Q2.

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

During this quarter, we've completed the rooms and lobby renovations at the Courtyard LAX, the Houston Marriott, the Kahler Inn and Suites, the Rochester Marriott, and the Doubletree Minneapolis.

We added a one-acre, family-focused pool and leisure area, along with an additional 10,000-square-foot outdoor function lawn at our Renaissance Sea World in Orlando.

Our remaining 2011 projects include the Master Plan renovation of the Marriott Long Wharf, which will be completed in Q3, the room and meeting space at the Hilton Houston, which will also be completed in Q3. Our last renovation project for the 2011, the rooms at the Del Mar Marriott, will begin in December. We do not expect any further displacement from renovations in these projects in 2011.

To anticipate a question regarding Marriott's new Sales Force One program, Marriott has been and remains the industry leader in group room night production. While Sales Force One has created some disturbance in hotel production cycles, we are working with Marriott on a market-by-market and hotel-by-hotel basis to execute refinements in the Sales Force One program, to ensure the program ultimately is a positive one for our portfolio.

With that, I'd like to turn the call over to John to discuss our balance sheet and financial initiatives.

Thank you, Marc. Good morning everyone. Today I'll give you an overview of several topics, including first, our liquidity and access to capital; second, our near-term debt maturities and obligations, including an update of the Doubletree Times Square refinancing; third, details regarding our earnings guidance; and finally fourth, an overview of our new quarterly earnings supplemental and materially increased investor disclosure.

Let's start with liquidity. Sunstone ended the second quarter with just over $205 million of cash, including $144 million of unrestricted cash. We intend to use roughly $90 million to $100 million of our sizable cash balance to de-lever the Doubletree Times Square as part of its refinancing later this year. Despite the recent turbulence in the capital markets, we continue to receive significant lender interest in refinancing the hotel, due to the property's superior location and room size.

Following the refinancing of the Doubletree Times Square, Sunstone's near-term debt maturities 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 of remaining exchangeable notes.

Based on the Company's market capitalization at the end of the quarter, the $95 million of maturities through 2014 represent less than 5% of our enterprise value. For more information, please refer to the new debt and debt maturities schedules on pages 20 and 21 of our supplemental disclosure.

In addition to our larger-than-normal cash position, we have an undrawn $150 million line of credit, and we have 11 unencumbered assets that collectively are expected to generate $34 million of EBITDA in 2011.

As of the end of the quarter, Sunstone has $1.67 billion of consolidated debt, which includes 100% of the $240 million mortgage secured by the Hilton San Diego Bayfront. Adjusting for the debt attributed to our minority partners in this asset, our pro rata debt balance is currently $1.61 billion. Our management team is completely aligned in our goal to gradually and methodically reduce our leverage, and improve our financial flexibility, but to do it in such a way that protects and maximizes shareholder value.

We updated our full year earnings guidance to reflect the pending sale of the Valley River Inn and our current view of operating fundamentals. A full reconciliation of current guidance and adjusted prior guidance can be found on pages 16 and 17 of our supplemental, as well as in our earnings release.

Assuming comparable RevPAR increases 6% to 8%, our adjusted corporate level EBITDA would be between $203 million and $214 million, and our FFO would be between $0.77 and $0.87 per share. Our updated EBITDA guidance includes a more conservative view of group business in the third and fourth quarters of 2011.

We have seen an improvement in demand growth third quarter to date. However, we believe a more conservative view towards the second half of 2011 is warranted, given the recent downward expectations for domestic economic growth.

We expect third-quarter adjusted EBITDA to represent approximately 23% to 24% of our full-year corporate EBITDA, and we would expect the fourth quarter to represent approximately 30% to 32% of full-year corporate EBITDA.

Now let's discuss our corporate disclosure and communication with the investment community. Sunstone, for the first time, has furnished supplemental financial information in conjunction with our quarterly earnings release. The supplemental disclosure is expected to help the investment community to more thoroughly understand our portfolio, our capital structure and our Company. Over time, this information will allow you to measure the effects of our asset management initiatives and our investment and financing decisions.

Specifically, we would like to draw your attention to several schedules and exhibits in the supplemental, including first, the robust capitalization and debt maturity information starting on page 19; second, property level operating fundamentals, including occupancy, rate and RevPAR, starting on page 25; and third, property level EBITDA and EBITDA margins starting on page 33.

To assist you in modeling earnings and net asset value, we draw your attention to the pro forma portfolio earnings for the current and prior periods, had we owned our consolidated 32-hotel portfolio and had entered into all financings from the beginning of all times presented. A summary of these pro forma financials are presented on page 14, and are reconciled in the appendix of the supplemental.

We believe that our decision to provide robust disclosure, in addition to our decision last quarter to provide earnings guidance demonstrates this management team's commitment to honest and direct communication with the investment community. Transparency, whether we are conveying good news or bad, will be the hallmark of this management team.

With that, I'll turn it over to Ken to wrap up our prepared remarks.

Before we open up the call to questions, let me reiterate the new management team's core objectives, which include delivering superior operating results, measured balance sheet improvements, and providing best-in-class investor disclosures and transparency. I want to take a minute to say thank you to the entire Sunstone team for their continued intense efforts in advancing these core objectives.

In spite of market challenges, Sunstone is clearly moving in the right direction. While our strong performance in the second quarter is a good start, it is clear to us that we must continue to execute on our business plan with discipline and consistency in order to build investor respect and unlock the potential value in our business. We as a team are confident in our ability to do just that.

With that, let's open up the call to questions. Camille, let's go ahead.

Thank you, sir. We will now begin the question-and-answer session.

(Operator Instructions)

Our first question is from the line of Eli Hackel with Goldman Sachs. Please go ahead.

Thanks, and good morning. Just 2 questions. First, can you just talk a little bit more about the de-leveraging strategy, especially in light of the recent equity prices, and if you were to buy some assets how you would theoretically fund those?

Then just the second question, just on the guidance. You said more conservative on the group booking side. Is that you expect group cancellations, or do you just expect fewer in the quarter for the quarter bookings, or what exactly did you mean by softer group booking trends? Thanks.

Great, thanks a lot, Eli. First of all, on your question about the de-leveraging strategy, while current market turbulence is obviously front and center on the minds of everyone on the call, we'll not be reactionary in our tactics.

Our business plan does entail a measured and deliberate de-leveraging of the Company. So, we'll execute on a deleveraging strategy in a way that's appropriate for market conditions and results in appropriate levels of liquidity as we go forward.

As far as funding acquisitions in today's environment, clearly, as we've talked about in the past, acquisitions would largely be funded through equity-denominated transactions, and in today's environment equity is not attractively priced for such tactics. I think you can assume that acquisitions will not be front and center in our business plan, at least for the near term.

On the group trends that we're seeing for our portfolio, our group pace is actually up for the remainder of the year. It's up 6.3%. That's made up of a 3.6% increase in occupancy and a 2.6% increase in rate, so we are seeing positive group trends. I think the tempering in our full-year projections is more a product of what we're seeing in the current environment, and given the high correlation between business trends and overall lodging demand, we think that caution is warranted, in spite of the fact that the early indications on Q3 in particular are very good.

So, you haven't -- just to be clear -- you actually have not seen anything flow through to your business specific, you're just working to be more on the safe side, given what's going on in the headlines and the economy, et cetera.

Eli, that's very safe to say. As we've talked about during the course of the year, we remain highly focused on the group productivity throughout our portfolio. Marc mentioned in his prepared remarks that the Marriott Sales Force One initiative, in particular, has drawn a lot of focus from our team. Ensuring that initiative is employed in a way that's productive for our hotels is a key focus of our asset management team.

And look, 2012 group trends are slightly down on a pace basis. So certainly we're focused on ensuring that group trends and productivity in terms of rooms booked into our portfolio for all future years is continuing to increase. Right now, on the business transient side in particular, we're not seeing a decline.

Thanks.

You're welcome.

Thank you. Our next question is from the line of Jeff Donnelly with Wells Fargo. Please go ahead.

Good morning, guys. Actually, I just have a single question, and I guess, Ken, it might be kind of a long one. First off, thanks for the additional disclosure. I had a question about how you see the source of your future margin growth.

If I look at the new disclosure, I think the top third of your hotels are running at substantially higher EBITDA margins than the bottom 2/3. That same group also grew your margins substantially more in 2010 and again year-to-date.

I know every portfolio has a subset of better assets and ones that are worse, but I'm wondering if in your case, you think maybe your margin potential in your better assets is closer to its peak? So, any further margin improvement for Sunstone will more likely be found in your what I call the bottom 2/3 of your portfolio? Does that make sense?

Yes, thanks, Jeff. This is Ken. I'll take that question initially, and then I'll shift it over to Marc. With respect to sources of margin growth, to put things into perspective, I'd like to talk about the new (inaudible) efficiency (inaudible) portfolio from prior-cycle trough to the most recent cyclical trough. In 2003, the margins on a same-store basis for our hotels troughed at 22%. 2009, as a result of efficiency measures that our team deployed throughout the portfolio, the trough margins were 230 basis points higher, at 24.3%.

Peak margins for our portfolio, and this does not include the Hilton San Diego, which didn't really exist during the prior peak, was about 30.3% in margins. Obviously during the second quarter we generated even stronger margins than that, but that is a cyclical phenomenon, rather than what we would view as representative of the full-year margin trend.

Marc and his team, and certainly our operators, have been incredibly productive at finding new ways to drive profitability throughout our portfolio, and we're highly confident that continued innovation at the portfolio property level will continue. Marc, why don't I shift over to you to give more specifics.

Jeff, 1 of the key things obviously, is that the high-rated markets obviously will drive a higher margin expansion. I think 1 of the things that we are counting on, and certainly expect, is that the investment that we've made throughout our portfolio -- and if you look at all the renovations that we've done throughout the portfolio, we think that there is room for solid rate growth, occupancy growth, and margin expansion within that -- I wouldn't use the term lower tier, but the current lower amount of EBITDA margin in those hotels. We expect to see nice growth from those moving forward, particularly the hotels which, as I said, is a large amount of the ones that were renovated.

Just 1 follow-up, Marc. I'm just curious if subsequent to quarter end -- have you guys detected anything in your portfolio, for example, have you seen the falloff in transient business, or is it just too soon to be seeing that?

No, we haven't. Jeff, it's 2 weeks of information. No, generically we haven't seen anything in the last 2 weeks that shows us anything. I think as you well know, that's just too short a window, and I think we'll just have to wait and see what occurs as people make decisions.

Jeff, as I mentioned, our July RevPAR number was up over 11%. So, clearly, we're not currently seeing the AGITA in the broader economic markets translate into slower business trends in our hotels.

Great, thank you, guys.

Our next question is from the line of Ian Weissman, ISI Group, please go ahead.

Yes, good morning. Just a couple of questions. Maybe you could give a little bit more color on the recent (inaudible) at Doubletree, where pricing is coming in and the underwriting was like?

Sure. Let me shift that over to John for that question.

Sure. We started -- Ian, good morning. We started the process to refinance the Doubletree Times Square about 6 weeks ago or so, and received a significant amount of interest in that asset, given the location of that asset, the quality of that asset and some of our plans for that asset. We are whittling down the potential lenders that we are working with this on that.

Clearly we're seeing a bit of turbulence in the CMBS market. I think that turbulence -- it's really been choppy over the past couple of weeks, particularly as 1 large pool of loans that went to the market was pulled because -- at least postponed -- because of a rating agency issue. We continue to monitor that, but I think it's safe to say that you're going to see an increase in inventory being warehoused in the near term, which is likely to cause some short-term disruption.

But, I will say that based on very recent conversations with CMBS lenders, that several remain very committed to hotel lending, but particularly to very high quality assets, and that's why I feel comfortable refinancing the Doubletree Times Square. In addition to that, there's significant interest from the balance sheet lenders in this asset.

Now, total pricing compared to where we executed on the Hilton Times Square, you're going to see probably something, call it maybe in the range of 100 wide of where we were there. So hopefully that's helpful.

Just -- that is, thank you. 2 quick other questions. Obviously, you talked about deals being off the table, given where your stock is, and certainly given where pricing is in the markets you want to compete in. How do you think about using any excess liquidity that you have today in buying back your stock, given that a trades that have plotted north of (inaudible -technical difficulty) have implied cap.

Ian, thanks. You broke up a little bit on the question, but I understand it was related to our appetite for using excess liquidity to buy back our shares.

Yes.

No disagreement from us that our shares are certainly trading at a level that's well below warranted value. As I mentioned in my comments, we as a team expect to execute on a strategy that will result in the shares trading much more in line with warranted value or above.

But in the current environment, given the level of turbulence that we're seeing, as I mentioned before, we're not going to be reactionary in our tactics, and we believe that maintaining fairly significant amounts of liquidity in this environment are prudent. So, at this point we do not think that a stock buy-back, as we sit here today, is warranted.

That's fair. And finally, you said in your release that the promotion -- your promotion as CEO, congratulations -- marks the end of co-leadership with Bob. What is Bob's role going to be going forward?

Bob is a member of our Board of Directors and he's always served as an advisor and counsel to the team as needed. Bob will revert back to that type of a role at this point, and we certainly, as I mentioned in my comments, do appreciate all the effort that he made during the course of this year to ensure stability and execution on our leadership build-out.

But, he will not be involved in day-to-day operations, is that what you mean by the end of the co-leadership, I guess?

That is correct, yes.

Thank you very much.

You're welcome.

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

Thanks again for the property-level disclosure. We appreciate that. Question on the disposition. You did announce, okay, 1 property is now being held for sale. Can you give us an update on how far along the marketing process that is, and just more generally, how that acquisitions are kind of off the table for de-leveraging strategy? Are you expecting to kind of increase the pace of dispositions and use that as an avenue?

Hi, Enrique. Yes, as I said in my prepared remarks, we've taken 1 asset into -- off the current roster and put it into held for sale. As has been our practice in the past, we'll comment on that sale when and if it closes. As far as examining our portfolio for additional sale candidates, we're certainly involved in that exercise at this point, but we have nothing identified or at least nothing that we want to talk about on today's call.

All my other questions have been answered. Thanks.

Thanks,.

Our next question is from the line of Brian Gallagher with Morgan Stanley. Please go ahead.

Hi guys. Most of my questions were answered. I was hoping you could give us some color, some thoughts about being a little more conservative, perhaps prudently, in your approach to guidance in group bookings in the back half of the year. Maybe you could add some color in terms of where your group pace is for the back half of the year, and what percentage of your expected group volumes are currently on the books versus what you can totally expect for the back half. Thanks.

Sure. As I mentioned, our group pace is up 6.3%, and that's made up of 3.6% increase in occupancy and a 2.6% increase in rate. Q3 pace is up about 4%, and it's flat in rooms and about -- so all of that is in rate. Q4 pace is up 1.6% at this point, and that's a 1 point improvement in rooms and basically just about a point in rate.

And what percentage of the total group that you had budgeted for the back half of the year is on the books?

We're in good shape there. We're actually ahead of where we were last year. As a percentage, I'd have to get back to you on that, but from a standpoint of comparable room nights to book compared to previous years, we are below the average of the previous years of what we have to book.

I guess maybe to ask it another way, then. What I'm trying to figure out is how much -- given what you have on the books right now, how much of an impact can forward group bookings for the back half of the year really impact RevPAR for you?

Well, first of all we're about 65% transient as a portfolio, or 60% transient as a portfolio. Group never has comprised a meaningful percentage of our business or the bulk of our business, I should say it a different way.

As Marc mentioned, most of the group business that we've put into our forecasts is on the books. To-bes are very low. We think it's prudent at this point for our forecasting purposes to eliminate any speculative or to-be type business. You can assume that the bulk of the group business that we're counting on for the remainder of the year is already locked in.

Great. That's helpful. Thanks a lot.

You bet.

Our next question is from the line of Bryan Maher with Citadel. Please go ahead.

Good afternoon, guys. Most of my questions have been asked and answered, but if we could just circle back to kind of your comments on reactionary versus a word I would use, which would be optimistic. Can you talk about, should the shares drop meaningfully further in this downdraft, if you have the authorization and kind of desire to actually buy back stock, if we see what we saw back in 2008 and 2009 when 1 of your competitors actually bought back about 50% of their float at ridiculously low levels. Is that something you would have an appetite for, and can you do that?

Bryan, thanks for the question. Look, it's somewhat hypothetical, but I will tell you that Sunstone reflects back on some of the tactics that we employed during the last down cycle, and we recognize that there was value destruction in those tactics.

So, while we're not going to change our strategy based on 1 day or a couple of weeks of market, what I would characterize as hysteria at this point, we absolutely will (inaudible - multiple speakers) in current market conditions and will adjust our tactics accordingly. But again, as I said, as we sit here today, stock buy-back is not front and center in our tactics. And let me shift over to John. He has some additional comments here.

Bryan, great question. Look, share buy-backs at the right time make a lot of sense, particularly if there's a big arbitrage between public and private pricing. I will say, though, that if we were to contemplate that -- and as Ken said, very theoretical question at this point -- but if we were to contemplate something like that, it would have to come with a series of transactions that materially increased our liquidity, so we weren't putting our balance sheet in any incremental risk by buying back that stock.

So, we are highly focused on leverage reduction and liquidity at this point, and we're very confident that with the game plan in place, even with kind of fits and starts to the economic growth, that we will get to where we want to be. But doing a share buyback in the near term would have to be accompanied by a couple other transactions, including something like material asset sales.

Is there anything, though, legally or in your covenants with any of your lenders that would prohibit you from doing something?

No.

Okay. That's what I was trying to get at. Thanks a lot.

You bet, Bryan.

Our next question is from the line of Smedes Rose with KBW. Please go ahead.

This is Rob Sloan stepping in for Smedes. Most of our questions have been answered so far, but I do have 2 follow-up questions. Firstly, now that you've been -- now that you've begun to disclose property level information, we were just looking at the Courtyard in Los Angeles, with its EBITDA running down about 20% year-to-date. Is there -- can you guys comment on whether or not there's something specific going on that property that might be causing that relative under-performance? That would be great.

Sure, Rob. Good question. We appreciate you having the disclosures. he Courtyard Los Angeles has been impacted directly as a result of a major renovation that we've had in place during the course of this year, and we expect to see a complete reversal of that trend post-renovation. If you get a chance, if you fly through LAX, I'd encourage you to come take a look at that property. It really came out great.

Okay, great. That's helpful. Also, secondly, you mentioned before that I believe your group pace on the books for 2012 is trending down about 3.5%, I believe. That's due to negative impact in DC and Baltimore. But I was wondering if you could maybe expand on markets where you're seeing more positive group bookings.

Sure. Let me take some high-level comments there, and then I'll shift over to Marc, who is really right in the middle of this. 2012 pace is down, a little over 3.5% at this point. Much of that is on the occupancy side.

Current 2012 tentative booking pace is up a little over 6%. So, there's certainly a significant amount of tentative books, tentative groups on the books that would flip that pace trend to positive if they were materialized.

DC and Orlando and Baltimore I think comprise the biggest drag on 2012 performance. But other markets, if you look outside of DC -- San Diego, 2012 pace is up 14%, with rooms up almost 10% and rate up 4.9%. Our Marriott portfolio ex-DC and Baltimore has paced up 3.2%, which is 5.5% in rooms and a little over -- about 2% down in average rate.

So, clearly we've seen isolated incidents of (inaudible - technical difficulty) pace in 2012. The booking trend in terms of tentative rooms certainly does more than bridge the softness gap in 2012, and a number of our markets are showing very positive trends. Marc, do you have additional color.

Sure. Thanks, Ken. Specific markets -- again, Ken mentioned San Diego, our Hilton San Diego looks very strong. Boston -- both our hotels in Boston and the 1 slightly outside the city in Quincy is strong. Boston as a city is going to have probably 1 of the strongest convention calendar years in a decade, with city-wides up considerably and room nights up 15%.

New York City is going to have a very strong city-wide calendar next year with current attendance up 25%. Our Houston hotels look very solid next year and our California hotels in our California corridor look reasonably solid for 2012, as well.

Okay. Great, guys, that's very helpful. Good luck for the balance of the year.

Thank you.

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

Good morning, guys. You touched a little bit about on dispositions, but just curious why aren't you guys looking to sell some -- is you talk about being able to drive growth at some of your bigger boxes, why not sell off some more of the peripherals and pay down some debt? As we see -- specifically some of your suburban properties as you've moved more inside the city, maybe in San Diego, some of the ones that just doesn't make sense to put CapEx into them?

Michael, thanks. Good question, and I should have been a little bit stronger in my prepared remarks with respect to dispositions. Clearly, asset sales at this point, especially for peripheral properties, is worth examining and is something that we are highly focused on at this point. So, stay tuned, we have nothing to report on asset sales, but we totally agree with you that looking to cull some of the assets from our portfolio in the current environment does make some sense.

Okay. Looking where the share price is today, I'd have to agree with that. Second of all, looking at -- you talked a decent amount about CapEx. Obviously you've got elevated renovations this year. Can you give us a sense as you look at 2012 what sources and uses could be on the CapEx front there?

Sure, I'll just give you a brief direction on 2012. We haven't talked specifically about our 2012 plan, and in fact, we're still continuing to refine our renovation projects for the year. As I mentioned before in my broader comments, strategically we'll look to maximize liquidity first and foremost.

It's a very positive fact with respect to Sunstone that we have completed the bulk of our desired renovation work already thus far this year. So the 2012 program could be fairly low in terms of dollars expended for CapEx, but at this point we're not prepared to provide any specifics.

Okay. That's helpful. Finally, no dividend again this quarter. Based upon the guidance that you gave, is there an expectation -- does that generate any taxable net income that would necessitate a dividend?

Yes. The guidance that we provided would result, based on our math, in taxable income. I'll shift it over to John to give you the specifics. We have a build-up of -- while it's not perfect, it helps the street to understand what EBITDA level would generate taxable income for our portfolio. John?

Yes, the easy benchmark to consider for Sunstone given where we are now, what the Company looks like now, is earnings over $190 million of EBITDA would start to generate taxable income to the common shareholder. So, based on our current guidance today, you should assume that there will be some level of taxable income and, therefore, would be required to pay a dividend.

Okay. That's helpful. Thanks, guys.

Thank you.

Our next question is from the line of David with Robert W. Baird. Go ahead.

John, I missed a little bit of the dividend comment and I just wonder if you could maybe go a little bit deeper into kind of what your thoughts are about the current common dividend. Are you really just planning to keep the common dividend as small as possible to keep within 100% payout of taxable income, or do you have other thoughts on that, as you balance that with de-leveraging?

Yes, I think that de-leveraging is clearly a goal, and we will evaluate the payment, the size of that dividend. Clearly, we have no interest in over-paying our dividend, and as a general rule, we expect to distribute taxable income, or 100% of our taxable income. Is that where you're going with that, David?

Yes. Also, trying to figure out whether you would do recurring cash every quarter, or what level you think is meaningful in terms of having an impact on your stock price? But, it sounds like your focus is really on paying out the least amount possible, as opposed to establishing a strong yield, for example?

David, hi, this is Ken. Let me jump in on this 1. Our objective is to maximize stockholder returns while improving our financial flexibility and de-leveraging the Company. So, if you look in the release today, we added a little bit of language around the dividends.

You're exactly right that our goal here is to drive returns for the stockholders. If the returns can be maximized through a healthy cash dividend, you'll see us employ that type of a tactic. Or if there are other angles that we can take on the dividend that we believe will drive the best returns for our stockholders, you'll likely see us employ those types of tactics.

No dividend declared this quarter. Stay tuned for the -- for future declarations of dividends, as well as the composition of the dividends, but we're examining all alternatives there.

If I could take a third cut at the disposition question. Can you give us an idea about how far you would go, how many assets or, for example, what kind of proceeds you might be hoping to gain from asset sales over the next couple of years?

Sure. So, again, let me lead in the comments with my discussion from earlier in the conversation. We recognize that the market turbulence and the economic, macroeconomic, concerns are kind of weighing on mindsets, as we said on the call today. We're not going to be reactionary in our tactics, but clearly if sourcing liquidity and de-leveraging the Company is a goal, which both of them are, looking to source that liquidity through asset sales is definitely a viable strategy, and we'll continue to analyze it. And so, you can take that to mean that is absolutely something that we're spending a lot of time analyzing, and you'll probably hear more on that over the next couple of quarters.

And then 1 specific on asset sales. It looks like you sold the Salt Lake City Laundry. Can you give us a little more on order of magnitude of proceeds for that, and would you consider selling -- I guess that's a small laundry compared to Rochester. That seems like a big 1. Would you consider selling that 1 as well?

Okay. On Salt Lake City, that laundry was kind of a vestige of our prior portfolio that we owned in Utah, which at this point we only own the Park City asset. That laundry was no longer core to the Utah market business. It was a break-even operation, and we sold it for just barely nominal proceeds.

As far as the Rochester Laundry facility, that is integral to that portfolio. It's a highly profitable laundry operation. It does a lot of outside laundry for -- commercial laundry for the various entities in that market, including the Mayo Clinic, so no plan whatsoever to do anything other than to continue to maximize the performance of that Rochester Laundry.

Other than the Rochester laundry, are there any other non-hotel real estate holdings in the portfolio?

Very little. We have 1 or 2 small office buildings throughout the portfolio. The only other non-real estate enterprise that we own is Buy Efficient, which is a successful procurement operation, which you may recall we purchased the outside 50% of that entity earlier this year, so that's a wholly owned subsidiary.

The office buildings are you talking 5,000 square feet, or stuff that you occupy?

More the former, 5,000-type square feet of offices.

Just it was sort of incidental to acquisition.

That is correct.

And how about the Royal Palm note, would you consider selling that as a way to pay off some (inaudible - technical difficulty)?

Certainly. The Royal Palm note, just to remind the callers, was a what we believe was a very good piece of mortgage paper we took back on that sale. The spread is 500 over a 1 point floor on LIBOR, and that shifts up to 600 over in 2013. And it benefits from completion guarantees, et cetera, et cetera. We love the collateral. We think it's a good piece of paper, but certainly we also think it's a monetizeable piece of paper, and we would explore selling that 1 as part of our liquidity strategy.

Okay, very helpful. Thank you.

You bet.

Next question is from the line of David Katz with Jefferies & Company. Please go ahead.

Hi, afternoon, all. I wanted to just go back to the issue of Sales Force One. If you could just talk -- recognizing that it's not the most prominent portion of your business, but if you could just put some detail around what challenges you've seen with it, and what reactions and what you expect Marriott to change with it, that would be helpful.

Sure, David. Look, Sales Force One has taken on kind of a mythical status at this point, with a lot of people picking up on it. As I mentioned in my comments, and Marc did as well, it certainly is a focus of ours. But Marriott has been a very strong group business producer, and we believe that with some re-calibration and some adjustments to the program, Sales Force One can be, and frankly in our experience with Marriott, will be a very successful initiative. Let me shift over to Marc specifically to talk about some of the tactics we've employed to ensure that it's beneficial to our hotels.

Thanks, Ken. Look, in some specifics, we have worked with Marriott to actually add back a position called the Destination Sales Manager that we've now put back in 10 of our 13 hotels.

That job allows for there to be greater clarity to review funnels and the leads that are coming in, and to really make sure that for our hotels, that potential group business is getting closed and the right people are being talked to. In addition to that, in some of our -- in our 3 larger hotels we're actually in the process of also adding back 1 or 2 individual sales managers in those hotels to be more proactive on new markets from that standpoint.

Look, we continue to work with Marriott and have found Marriott to be very open as the manager, and look, at the end of the day, they benefit just as much as we do from having this win, and having revenues grow.

All right. Now does this -- if I can follow that up. Does that cost you more, or is it a re-allocation of a resource?

I think at this point, it's both a re-allocation and, I guess in theory, a potential slightly more cost, but remember, if we grow revenues, and continue to grow it, the costs really are just at the same percentages they would exist for normal additional group room nights.

Perfect. Well done, guys. Thanks very much.

Thank you.

Our next is from the line of Dennis Forst with KeyBanc. Please go ahead.

Good morning, guys. I just didn't have any new questions, just wanted a little more granularity on some of the questions already asked. First, on transient. Ken, I think you said it was about 60% of your overall business.

Yes.

Can you break that down between business transient, leisure transient?

Sure. Let me shift over to Marc. He's got a very detailed table in front of him right now. Most of our transient business is business in orientation. As you know, our portfolio is primarily urban-branded hotels which cater to the business travelers.

But we break it down, not only between business transient and leisure, we spend a lot more time focusing on premium bookings throughout the segmentation within the business transient sector. So, Marc, do you want to give Dennis some detail?

Sure. For Q2, 2011, group made up 30.9% of our business, transient made up 64.5%, business made up 30.7%, leisure made up 16.1%, government made up 3.4%, and contract made up 4.6%. And again, you saw what you would expect to see -- contract business declined, government declined, leisure premium was up, and corporate premium and benchmark was up, as well.

Okay. Good. Thank you for that. The next 1, on the Royal Palms, you're talking about taking back the paper. Who is the current owner? Who is the debtor on that?

We sold that hotel to KSL. The asset itself, it's a secure mortgage. It's secured by the asset. It benefits from a completion guarantee on the renovation. The non-recourse guarantor on the loan are certain entities within the KSL portfolio.

Lastly, you said that production was down 4.7% in the second quarter versus second quarter 2010. Can you give us a little color on that?

Sure, Dennis. I'll shift it over to Marc on that. But I'm glad you asked that question because we spend a lot of time talking about pace, which is kind of a popular term. Marc has appropriately shifted our focus to pro

duction, which is less about what's on the books for the remainder of the current year or the subsequent year, but more importantly about what are the sales teams producing for all future periods. So, let me shift it over to Marc to talk a little about the production trends that we're seeing, and how we're focusing our asset management efforts to make sure that those production trends improve.

Great, yes. Just as Ken talked about, again pace, particularly over the last several years because of the movement, the big swings, can sometimes be disguising. So, for us, we look at what is the machine producing for both current year and future years, and so actually our production outside of 2 hotels, DC and Orlando for Q2, was actually up 7.3%.

Orlando had a basically very tough year-over-year comp with a particular piece of business that they booked last year that was a multi-year, and DC is soft currently, with a 30% decline next year. And most of the production decline there was really in '12.

The good news is that in DC, our current production and our booking pace in DC reflects that hotel returning to peak and beyond peak performance in 2013. And actually, our Orlando hotel is actually ahead of pace for 2012. So, it's an interesting dichotomy that their production is down, but their pace is ahead 6% in group room nights.

Okay. Now I'm more confused. Give me a layman's definition of production.

Yes. Production is basically what the sales offices or sales teams book for all -- for the current year and all future years, and pace is only a reflection of how a specific hotel sits, compared to the same time last year for the year it's in, or the following year.

Okay. Thank you very much.

Thanks, Dennis.

There are no further questions at this time. I would now like to turn the call over to Mr. Cruse for closing remarks.

Thanks, Camille and thank you all again for your time today. While these are clearly challenging times, Sunstone is moving in the right direction. Our business plan is structured well for the current environment and our team is focused on operational excellence and fiscal discipline. We look forward to speaking to you in the coming weeks. Thank you.

Ladies and gentlemen, this concludes the Sunstone Hotel Investors Second Quarter 2011Earnings Conference Call. You may now disconnect.