Sunstone Hotel Investors Inc (SHO) 2015 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Sunstone Hotel investors first quarter conference call.

(Operator Instructions)

I would like to remind everyone that this conference is being recorded today, Tuesday, May 5, 2015 at 9 AM Pacific Daylight Time. I'll now turn the presentation over to Bryan Giglia, Chief Financial Officer. Please go ahead.

Thank you, Tim, and good morning, everyone. By now, you should have all received a copy of our first quarter earnings release and supplemental, which we released yesterday. If you do not yet have a copy, you can access it on our website.

Before we begin this call, I'd 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 adjusted EBITDA, adjusted FFO and hotel EBITDA margins. We are providing that information as a supplement to information prepared in accordance with Generally Accepted Accounting Principles. In addition, hotel information presented includes our adjusted comparable 30 hotel portfolio, with prior ownership results for the Marriott Wailea which we acquired in July of 2014. The 2014 hotel information has also been adjusted to conform to the industry's uniform system of accounts 11th revised edition which became effective in January of 2015.

With us today on the call are John Arabia, President and Chief Executive Officer, Marc Hoffman, Chief Operating Officer, and Robert Springer, Chief Investment Officer. After our remarks, we will be available to answer your questions. With that, I would like to turn the call over to John. John, please go ahead?

Thank, Bryan. Good morning, everyone. On today's call, I'll provide a few highlights of our hotel performance and the current operating environment, as well as an update of our two value add repositioning projects in Boston and Wailea. Next Marc will review our first quarter operations in detail, followed by Bryan who will then walk through our updated earnings guidance, in addition to our recent capital transactions which have increased our financial flexibility.

To begin with, our portfolio outperformed our previous expectations for the first quarter. RevPAR growth of 7% exceeded the high end of our initial guidance of 5% to 6.5%. Adjusting for the hotels under renovation in the first quarter of both 2014 and 2015, including the Hyatt San Francisco, the Hilton Garden in Chicago, the Renaissance Long Beach under renovation in 2014, and the Boston Park Plaza under renovation in 2015, our non-renovation impacted RevPAR growth would have been 6.8%.

This generally indicates that the benefits of renovations completed last year, modestly exceeded the renovation disruption this year. We are very pleased with the continued operational improvement in our recently renovated hotels, including four of our hotels that generated over 30% RevPAR gains in the first quarter.

While room revenue growth was strong, food and beverage and other income were really the stars of the quarter. During the quarter food and beverage revenues increased 6.7% driven by a10.6% increase in banquet revenues, and a14.1% increase in audio visual sales per occupied group room.

Food and beverage revenues continue to strengthen, as groups add more events to their programs, as well as upscaling of functions in quality and size. Similarly, other revenues increased 12.1% during the quarter for a variety of reasons, including the implementation and restructuring of resort fee programs at certain of our properties, and increasing cancellation and attrition revenue, and an increase in tenant lease revenues at a few of our hotels.

The stronger than anticipated non-rooms revenue meaningfully contributed to the 7.2% increase in comparable property revenues, which in turn drove a 220 basis point increase in hotel EBITDA margins, and an exceptionally strong 17.1% increase in comparable hotel EBITDA. All of these figures exceeded the high end of our expectations.

We achieved strong performance in the first quarter despite our two hotels in New York City, which continue to face the headwinds of additional supply and softer international visitation, as a result of the stronger dollar. Our two New York City hotels make up approximately 9% of our total hotel EBITDA. We expect New York to underperform the portfolio throughout the year, as room rates continue to moderate, and operating costs continue to increase by at least an inflationary rate.

However, weakness in New York has been offset by strong growth in markets such as Boston, Orlando, and most of the West Coast, as demand strengthens, occupancies continue to grow and pricing pressure intensifies. Furthermore, lower oil prices have already had a positive impact on transient bookings in Wailea, as air fares to Hawaii are showing a 10% to 15% year-over-year declines, particularly from key markets such as Los Angeles and San Francisco.

In 2014, our full year comparable occupancies surpassed the prior peak levels by approximately 360 basis points. Occupancy continues to increase, as evidenced by our first quarter occupancy exceeding the first quarter prior peak occupancy by 460 basis points. As a result, several of our hotels are now limiting group room nights, and shifting group patterns to lower occupancy weekend nights, due to the strength of midweek transient demand.

Our full year 2015 occupancy is expected to increase 50 to 100 basis points. With a fairly benign supply forecast for most of our markets, we believe it is more likely than not that occupancy will continue to grow in 2016. Should this be the case, there is a strong argument to be made that pricing pressure will continue to intensify through at least next year. These trends bode well for the remainder of 2015 and beyond.

Now let's talk about our recent and ongoing capital initiatives. We expect to invest between $145 million and $160 million to renovate and reposition our hotels in 2015. This represents a $20 million reduction, compared to the estimate provided last quarter.

That said, the reduction is attributed to the expected timing of payments, rather than a change in scope of renovations, meaning a portion of the cash that was planned to go out the door in the fourth quarter of 2015, will not be paid until the first quarter of 2016. However, we may have the opportunity to accelerate some of the outdoor pool renovations in Wailea during the fourth quarter of this year, compared to our previous plan of next year.

Of our total capital investment in 2015, more than half of this capital will be invested in our three most recent acquisitions. This includes $34 million to $38 million in the Boston Park Plaza, $25 million to $27 million at the Marriott Wailea, and potentially more if we elect to accelerate some of the public area work, and $21 million to $23 million at the Hyatt San Francisco. All of these renovations are proceeding as planned, and we are very happy to report that the 2015 results for both the Hyatt San Francisco and the Marriott Wailea are expected to materially exceed our initial underwriting.

For the full year 2015, we expect to incur $3 million to $5 million of room revenues displacement, for an incremental $1 million to $2 million, compared to the roughly $3 million of revenue displacement we witnessed last year. $1.3 million of displacement was incurred in the first quarter, leaving $2 million to $4 million of the remainder of the year weighted heavily to the fourth quarter. Again, this figure may increase a bit, if we're able to accelerate certain public space projects at the Marriott Wailea later this year.

So let's talk in more detail about the Boston Park Plaza and Marriott Wailea. I am please to announce that we have completed the public space renovations at the Boston Park Plaza. All public space and meeting rooms, and most of the retail outlets including the new David Barton gym and Strip by Strega restaurant have been completed, and are open for business. The hotel looks great, and more importantly is performing in line with our expectations.

The reaction to the renovation has been overwhelmingly positive, and we are booking group business into this year and next year, at a rate premium of roughly 20% to what the hotel was achieving prior to renovation. Additionally, year-over-year catering pace revenues between April and December are already up 21%. We look forward to showing all of you the hotel's transformation on June 24, during our scheduled investor property tour.

Now off to Maui, to our Marriott Wailea beach resort. We have seen a very strong start to 2015, with first quarter RevPAR up 10%. This strength is the result of a few factors, including strategy changes developed between our asset management team and the hotel, and low fuel prices which have benefited the Maui market. Currency changes have not impacted the hotel's results, because of most of Maui's visitation originates from the mainland US, as opposed to Asia.

We continue to move forward with implementing our asset management initiatives, and are scheduled to begin a full renovation of the meeting space on June 1, and soft goods renovation in all the guest rooms during the fall. We'll finalize the hotel's repositioning in 2016 with extensive improvements to common areas and pools, in order to materially elevate the resort's experience, and make the property far more competitive. In summary, the renovation and repositioning of these assets are proceeding as planned, and we remain excited about the growth prospects of these hotels.

Finally, I would like to share a few quick thoughts on the investment environment. While we have actively pursued various investment opportunities over the past several months, we have been surprised by the strength of the bids we have competed with. Private market pricing continues to increase, which has resulted in a separation between public and private market valuations.

We have difficulties explaining the pricing on some recent transactions, particularly if buyers anticipate cyclical downturns in their underwriting, as we do. With a share price below NAV, and strong bids coming from both public companies and private equity, there is a very good chance that we will be unable to source acquisitions that exceed our cost of capital. That is, there is a strong possibility that in the current environment, we are net sellers in 2015. With that, I'll turn it over to Marc to discuss our first quarter operating results, and the current operating environment. Marc, please go ahead?

Thank you, John, and good morning, everyone, and thank you for joining us today. I will review our portfolio's first quarter operating performance in greater detail. For the first quarter, we saw our comparable RevPAR grow 7% to $150.12 through a 5.3% growth in ADR, and the 130 basis point improvement in occupancy. Overall, nine of our hotels generated double-digit RevPAR growth during the first quarter, including our Hyatt Chicago Magnificent Mile, our Chicago Embassy Suites, our Chicago Hilton Garden In, the Marriott Wailea, Portland, San Francisco, and our LAX Ren.

Hotels witnessing flat to negative RevPAR included our two New York hotels, and the Boston Park Plaza, which was under heavy renovation. With occupancy continuing to be at record levels, and with demand trends continuing to improve, our operators have focused on increasing transient rates through a proactive revenue mix management, and just purely bringing up the rate. This strategy has helped to increase our premium business, portfolio wide.

Specifically in the first quarter, we continue to focus on decreasing our reliance on discount channels. During Q1, all our discount segments declined by 12.9% in room nights, while increasing a strong 8% in rate. In Q1, we saw our 3.1% room night decline in special corporate, but a 4% increase in the special corporate rate. Our hotels have limited availability midweek, and are starting to close out or limit the number of lower rated special corporate rooms, as well as lower rated group.

During Q1, we continued to see strong cyclical trends in food and beverage, improving throughout our portfolio. Our food and beverage revenue as John said, grew 6.7% year-over-year, with a 420 basis point improvement in F&B margin. Our margin strength came from both control and re-creation of menus. Our revenue growth is coming heavily from groups increasing their number of events, increasing the quality of food and beverage offerings for their events, as well as from enhanced audio visual as well as our reinvented lobbies and lobby bars.

We also continue to see revenue and cost benefits from our reinvented bars as I've mentioned, and we'll continue to make these changes throughout 2015. For full-year 2015, our current group pace for all 30 hotels has decreased to 4% positive. Our pace growth is now coming 100% from rate, representing a clear opportunity for the remainder of the year.

We continue to see group strength in several of our hotels, such as the Renaissance DC, Hyatt San Francisco, Renaissance Orlando. Our 2015 pace is lower due to the Boston Park Plaza, which had limited group business during the first quarter, due to the renovation of the meeting space. In addition, as John mentioned, a few hotels have applied a strategy shift, taking less group, and waiting for transient business to take advantage of higher transient rates.

For the first quarter, our 30 hotels comparable portfolio group room night production, for all current and future years declined slightly from the peak year last year by 6.3%. However, Q1 bookings remain the second highest first quarter in the last eight years. We continue to see strong group trends throughout our portfolio into 2016. More importantly, our 2012, 2013, and 2014 renovated hotel trends remain highly positive, as they continue to benefit from the renovations.

Let me turn now to Bryan to review our liquidity and guidance. Bryan, please go ahead?

Thank you, Marc. At the end of the quarter, we had $244.2 million of cash on hand, including $87.3 million of restricted cash. Last week, we repaid the remaining $99.1 million in mortgage debt that was due in 2015. As a result, our pro forma unrestricted cash balance adjusting for these debt repayments would have been approximately $58 million.

The $99.1 million in loans were secured by the Marriott Houston, Marriott Park City, Marriott Philadelphia, and the Marriott Tysons Corner. We have now addressed all 2015 debt maturities. We now have 18 unencumbered hotels that collectively generated $132.5 million of EBITDA in 2014.

In addition to our cash position, we recently announced that we entered into a new $400 million senior unsecured credit facility. The additional capacity on the line provides additional financial flexibility that we will use to execute on our business plan over the coming years. The additional capacity does not mean we are going to use the credit facility to lever up, or to go out and aggressively acquire assets, rather it provides increased flexibility that we expect to be available during all stages of the cycle.

We now have $1.4 billion of consolidated debt in preferred securities, which include 100% of the $228 million mortgage secured by the Hilton San Diego Bay Front. Our leverage consists entirely well-staggered, non-crossed mortgage debt and preferred securities. Our debt has a weighted average term to maturity of approximately four years, and an average interest rate of 4.3%. Our variable rate debt as a percentage of total debt stands at 30.5%.

We are exceedingly comfortable with our current leverage profile, and our ability to continue to achieve our long-term credit milestones. Consistent with our track record we've built over the past several years, we expect to further improve our balance sheet, and increase our financial flexibility in a gradual and shareholder-friendly manner. Yet we retain considerable flexibility to take advantage of opportunities as they present themselves.

Now to update the 2015 guidance. For the second quarter, we expect RevPAR to grow between 6% and 7.5%. We expect second quarter adjusted EBITDA to come in between $103 million and $107 million, and we expect second quarter adjusted FFO per diluted share to be between $0.40 and $0.42. For both second quarter and full-year outlook, we anticipate approximately $500,000 to $1 million of revenue disruption due to the lingering impact of last week's civil unrest in Baltimore, Maryland.

Our full year 2015 adjusted EBITDA guidance ranges from $344 million to $356 million, and our full year FFO guidance ranges from $1.26 to $1.32 per share. At the mid-point, this implies a 10.3% increase in FFO per diluted share compared to 2014. With that, we'd like to now open the call to questions. Tim, please go ahead.

(Operator Instructions)

We'll take our first question from Ian Weissman with Credit Suisse.

Yes. Good afternoon, good morning.

Just a quick question. John, about your comments about the strong bid for real estate today. And then, if you counterbalance that to the challenges that New York City is currently facing, would you make the same comment about Manhattan for the strong bid?

We continue to see, first of all, good afternoon, Ian, we continue to see strong bids largely from international capital in New York City. That is a market that as you know we have not been active in. We have two hotels that are incredibly well-located, in or just off the Bowtie in Times Square that, as you can see in our first quarter results did not fair well, and we expect that they will continue to have headwinds. Having that said, I believe strongly, we believe strongly that those asset values have continued to increase. So yes.

Can you maybe then provide a little more color or clarity on when you said you would consider being a net seller in 2015? Maybe if you could just provide a little bit more details about markets or strategy, and what would that include? Would New York be on the table for sale in 2015?

No, as an asset allocater, Ian, everything is on the table. We have a policy of not disclosing specific information until transactions are hard or completed. But any area in which we can find dislocations between what we believe to be the market value, and what we believe the long-term cash flow support, is obviously something that we will try and either invest in, or dispose of depending on what side of that arbitrage we could find.

So there are still -- as we've been talking about for years, there are also a couple of legacy hotels that long-term just really don't fit the portfolio. I can see those, in addition to opportunistic sales, I can see those being assets that are probably not long for our portfolio.

Okay. And just another question.

Your comments about occupancy being up over the next two years. Most markets are way beyond peak occupancy, I think 500 basis points on average across the top 25 MSAs. So we've seen very strong occupancy uplift. What's the frictional vacancy rate if you call it, where we could start to see rate move materially higher from here? Just seems to be that there is a cap on rate about 4% growth. What gives you confidence that we could start to push rate higher here?

I would have thought we'd already hit that inflection point. And if you take a look at historic data, it would suggest that occupancy levels far lower than we are now, is a point where operators have pricing power. It's been a little disappointing in this recovery that we have not yet seen more pricing power, but we -- particularly Marc and his asset management team are really working with our operators and trying to give them the confidence to continuing to push rate.

But we are running out of key group times, with occupancy being so high. We feel comfortable that if this continues, which we think it will, that pricing pressure should continue to intensify rather than moderate.

Right.

And finally, just last question for Bryan, it may be a little bit too early to ask this question, but as far as your preferreds that expire next year, I think it's $150 million of 8% preferreds going out, I think April of 2016, any thoughts on your plans there?

Good morning, Ian.

Yes, they do come due, or are callable in April of next year. That's something we'll continue to watch the markets. It is a very fluid market.

So right now, there's really nothing that we can do with those. As we get closer to April, if the market remains where it is, there looks like there would be an opportunity to exchange those out for a lower coupon. We'll have to get closer to that time, to get a better idea of what that delta will be.

Care to share any thoughts on where you think the coupon would be?

I think the current market is, the spot market today is roughly 100 basis points. Maybe a little bit more.

Right. Okay. Thank you very much. I appreciate the color.

Thanks, Ian.

We'll take our next question from Thomas Allen with Morgan Stanley.

Hey, good morning.

Hey, Tom.

So your first quarter RevPAR came in around 7%. I assume you have pretty good visibility, in the second quarter, you're at 6.5% to 7%. But you maintained your full year RevPAR guidance of 5% to 7%, implies things are going to slow down in the second half. Can you just help us think that through?

Sure. As we've alluded to, this is not a Sunstone topic, really it's an industry topic. The third quarter is going to be a challenge I think for everybody, largely because of a shift in Jewish holidays, both falling during the week as opposed to weekends last year, and Labor Day falling a week later this year. So we've always known, and talked about the third quarter will be a little bit softer, in terms of just year-over-year growth.

And for us specifically in the fourth quarter, that's when you'll see the lion's share of our renovation disruption. That should be in the fourth quarter. We're probably talking about just a little over 100 basis points. So there is a bit of a moderation going into the third and fourth quarter.

That's helpful. And then on New York, can you bifurcate -- is there any way to bifurcate the impact of lower international demand, versus higher supply, versus maybe some of the nontraditional lodging supply that's coming in? And think through how it's impacting the market overall? Thanks.

No. I mean, while we believe strongly that both are having an impact, it's really difficult, Thomas, to bifurcate the impact of both of those. But we do believe that it -- that both are having an impact.

And sorry if I missed this earlier, but did you give any data points -- some of your peer have given data points on their international rooms filled this first quarter, versus last year? Any other data points around international demand?

Well, when you take a look at New York, and I'll let Marc take over here in a second if he has anything to add, but roughly speaking, our two Manhattan properties are call it, 25% from international markets. So if we've seen -- if we've seen a downturn of let's say, I think Expedia has suggested that the number of room nights might be down as 10%, 12%, that will help you triangulate it.

Great, thank you.

Thanks, Thomas.

We'll take our next question from Rich Hightower with Evercore ISI.

Hi, good morning and good afternoon.

Hi, Rich.

So a couple questions here, so on the topic of the upsized credit facility, and I think Bryan actually preempted one my questions in his prepared remarks about it possibly prestaging additional investment activity. Doesn't sound like that's necessarily in the cards.

Walk us through how you balance out the fees you pay on the additional capacity versus the old $150 million facility? And then also, in light of what sounds to be a reasonable likelihood of additional asset sales later this year that would also generate liquidity?

Good morning, Rich.

The old facility, the $150 million credit facility was too small for a $5 billion asset value company. We have not updated that facility in a number of years, and you have seen several of our peers have updated their facilities, two to three times since then. So this was a long due overhaul of the facility.

The $400 million, when we looked at the $400 million, when we looked at the sizing of the facility, we looked out over the next five years. And with our credit profile and our leverage where it is, this is one form of capital that we can be fairly confident that whatever may happen and whatever downturn may come, that with our leverage where it is, that this will be capital that will be available to us. And that was more of a longer-term view, than any sort of short-term view, as to what will we be using a big portion of the facility in the short-term. The answer, probably not. But as we look out over the next couple years, this is a form of capital that we feel very comfortable will be available to us.

Okay, that's helpful, Bryan. Thanks.

And John, appreciate your candor in the prepared remarks regarding the current investment landscape, and kind of where Sunstone is shaking out relative to some competitors nowadays. By your estimation, just to help us, where in your underwriting do you think you are being a little more conservative than the competition right now? Is it in terms of the cyclical downturn you referenced, is it in terms of the IRR, is it in terms of leverage availability? Just walk us through that process as it relates to Sunstone right now, if you don't mind?

Sure. We really have not changed the methodology in which we underwrite assets, and I'm going to turn this also over to Robert Springer for any color. But we have over the past several years underwritten cyclical downturns.

Now we will most likely be wrong in terms of the timing of that downturn, the magnitude of that downturn, but we believe strongly that assuming downturns in your underwriting reflects more accurately the earnings power of that asset.

In addition to that, you need to be careful we believe with your residual cap rates, in the context of what is a very low interest rate group. And so, I think between the two of those, even where we don't see other people's underwriting, I think it'd be -- we have prepared ourselves, and I think it would be logical that the farther we go into a cycle, those disciplines might keep us on the sidelines at this point in the cycle versus some of our peers.

And if that is the case, we're comfortable with that. We don't need to transact to be relevant. I think we are going to transact smartly, rather than just focusing on volume.

Okay. Thank you, John.

Thanks, Rich.

We'll take our next question from Anthony Powell with Barclays.

Hi, good morning, everyone.

John, on the asset sales, what do you envision the use of proceeds to be if you were to sell one or more assets this year? You do have the $150 million share repurchase authorization. Would you use that as a use of proceeds?

It'd really depend. It'd really depend on where we are in terms of asset values. It will depend on where our share price is. It will depend on any debt or preferred that we have the ability to bring in, so it largely depends.

And then obviously, if we cannot find interesting acquisition opportunities, or we're not comfortable with prices of acquisition opportunities, returning capital to shareholders through some form is always on the table. So I am not trying to dodge the question, but at the end of the day, it really just depends on what is best for the Company, our long-term goals, and total shareholder returns.

All right, great. And just a longer-term question on New York City. Given where the differences between private market valuations and public market valuations, and some of the EBITDA generated in New York City hotels, what's kind of the long-term rationale of being in the New York City market as a public REIT? Do you still like the market long-term? Would you invest in it further, if given different circumstances, and what's your view on that?

Very long-term, New York has proven to be the one market that is most resilient to suppliers that have been able to absorb supply. It has really positive long-term -- if you're talking about long-term, I'm talking about the next 10, 20, 30, 40 years on a very long-term basis, we believe the operating fundamentals in New York are attractive so (multiple speakers) I'll turn it over to Robert.

Yes, good morning, it's Robert. I think long-term -- if you look back over the last several years, one thing that we have to acknowledge is the incredible amount of supply that has been effectively absorbed into New York. Now none of us are terribly happy with the growth that, current -- or lack thereof that we're currently seeing in New York.

But if you look at the total supply of hotel rooms in New York, and the amount that's been absorbed, and the occupancy that the market is still able to achieve, I think it's a testament to the strength of the market long-term as a both domestic and international travel destination.

Great. Because on the opposite side, we've seen you get strong results in Chicago and Boston this year. Number one, were there any kind of one-time or short-term boost to those markets in the first quarter? And two, how do you see the supply growth environment and the conventional calendars for those two cities this year and next? Thank you.

Hey, Anthony, thanks. This is Marc Hoffman.

We're very excited about Chicago and Boston. There were some good citywides in Chicago in the first quarter, but in general we believe Chicago is going to have a very strong 2015.

And I could not be more positive about Boston, a, having been there, b, being a Patriots and Red Sox fan, and c, the strength of that market, again, given the number of the citywide, the strength of the market et cetera. We see Boston, again, it's going to be at their peak citywides next year.

2016 and 2017, they're going to do somewhere between 28 and 30 citywides. You have basically zero to minimal growth in Boston. So feel very positive about both of those markets, as well as San Francisco and Orlando next year.

We'll take our next question from Chris Woronka with Deutsche Bank.

Yes. Hello. Good morning.

Good morning.

I want to revisit the Park Plaza in the context of Starwood now adding another soft brand, and just your updated thoughts. As you get closer to having that thing completely where you want it, I'm guessing there's probably key money available from them and others, and any just updated thoughts on potentially soft branding that?

We have been approached, and we've analyzed several brand strategies there. Right now, particularly as we are going through the repositioning, the redevelopment of the Boston Park Plaza, I think you'll most likely see us continue to implement an independent strategy there. It is a very high occupancy market.

Highgate, our operating partner there, does a very good job in a hotel like that, and that gives us a lot of flexibility to improve the asset largely as we see fit, while at the same time holding onto a considerable amount of brand optionality longer-term. So more likely than not, that it will remain an independent hotel, particularly as what that means to -- without having that financial encumbrance, what that means to the longer term value particularly on sale. I'm not suggesting we are selling it, but we're pretty happy with the position we are in right now.

Okay. That's great.

And then, I wanted to go back to something that you mentioned at the beginning, in terns of the cancellation attrition fees, and you mentioned some I think added resort fees as well. And we heard from Marriott last week, that they had recently changed their cancellation policy. Where do you think we are in terms of that as a revenue opportunity? Are there still more things you think are to come from the operators as we get, if the environment remains so strong?

Hey, Chris, it's Marc Hoffman. Thanks.

Yes, we believe, and I think you're starting to hear a lot of the brands talk, about this movement to strengthening fee program, similar if you look at the results and the success of the airlines. Clearly, the first move by all of the brands to move beyond 24-hour cancellation to 48, and in some cases, 72 in strong months. And I think you are going to see more of that, as we move into this extreme high occupancy cycle and continued compression.

Okay, very good. Thanks.

Thanks, Chris.

And we'll take our next question from Bill Crow with Raymond James & Associates.

Hi, good morning. John, a couple questions for you. I think your predecessor certainly, and maybe you shared the philosophy, but you had a minimalist philosophy towards the dividend. And I'm just wondering whether the change in acquisition landscape has maybe made you rethink the dividend, and its priority from a cash perspective?

It's really interesting question, Bill. It really comes down to if at the end of the day, and this is obviously something that the Board will debate and finally make a determination on. If we have purpose, if we have reason, rationale to take that incremental capital and to invest it wisely, then I think that would be our preference. Rather than deploying that capitol through a dividend, and then having to turn right back around and raise that capital, which generally has a cost associated with it.

To the extent that we do not have interesting investment opportunities, which I'm hoping that is not the case long-term, then I think we would have to have a discussion about, at what point do we start returning that incremental capital to shareholders, be it one of several different methods. And on that table, would, obviously, be, potentially, cash dividends.

All right. Say, John, if you were to go back to your prior employer today, and I don't get to see -- I didn't get to see what you were writing back in the day, but would you be calling for industry consolidation at this point? Whether you get a couple larger REITs set to list in the next month or two? What's your history of thought there? (Laughter)

Thanks for putting me on the spot there, Bill (Laughter). Look, I've been saying consolidation would make a lot of sense for almost the 20 years that I've been in this business. And I think the shortest book I ever read was -- or the shortest book ever written was the REIT to REIT consolidation in the hotel space.

And what we found is, what we used to call a host and the seven dwarves: we now have a host and seven dwarves, and a bunch of micro midgets. And it's -- the market is accepting that. I don't really understand why we have 18 or 20 hotel REITs, but that's not for me to decide. It's not for me force an issue on.

But it strikes me when you take a look at the other major sectors, you have much larger companies. I think that there are some benefit of that incremental scale. But at the end of the day, it's shareholder returns that matter, not just scale.

But I do think it's an interesting phenomena that we continue to have hotel REITs coming to market, and many of them just really don't really have a differentiated strategy. So what to do about it? Nothing from my chair, really, but I do find it interesting.

Thanks, John. Appreciate the color.

Thank, Bill.

And we'll take our next question from Jeff Donnelly with Wells Fargo.

So is it better to be a dwarf or a micro midget, John? (Laughter)

I won't touch that one, Jeff. I'll let you decide.

Well, actually I'm sorry this is repetitive, but I missed, unfortunately, some your responses to the question about the robustness of the transaction market. I was curious, did you talk about whether you feel that pricing is debt-fueled, or maybe driven by maybe foreign buyers with a greater focus on US dollar investments? And I guess, I am curious, are these folks you're used to seeing in the hotel transaction market?

Really all the above. I think we've seen a stronger private equity bid because of the cost and availability of debt. Particularly on the coast, Southern California, New York City, we have seen new bids coming from either sovereigns, or coming from Asian buyers that we had not seen before.

Now to be frank, weighing through some of those bids or weighing through some of those overtures, I should say, takes time to see if people are real or not. But it does seem that there has been substantially more interest from foreign buyers.

And then at the same time, we're also seeing heavy competition coming from several of our REIT brethren. So it'll be interesting to see now that there's been a pause in share pricing, how that trickles through REIT pricing or REIT bids. But quite honestly, Jeff, we've seen bids from really across the board, suggesting that hotel values just continue to increase.

And how do you think about them relative to replacement costs? Because obviously, when we look at other property types, even in California, I think of who -- if it was easier to build in California, you might see more construction. But the point being, is valuations on some cases actually begin to approach replacement costs or surpass it, given that development is kicking in. You haven't quite seen that yet in hotels, yet. So I guess I'm wondering, like what's the metric you're looking at to sort of measure the robustness of the bidding?

I don't think we're at replacement costs in most markets, potentially in some. But remember, development costs are not static. You're competing with land, you're competing for land with other types of developers.

And construction costs as we've seen with our own value add repositionings continue to increase. And then, there are certain markets quite honestly, where getting the right trades is becoming more and more difficult. We've seen that quite honestly in Boston.

Right. And actually speaking, just one last question. I guess, it's kind of nit-picky. But at Park Plaza, one of the your other competitors bought the hotel across the street, the Revere that came with the parking garage. I'm just curious, is that facility used for Park Plaza's guests and valet services? I wasn't sure if the change in ownership might change your economics for providing parking for guests and things?

Yes, I'll send this over to Robert Springer.

We don't actually currently park our cars at that garage. There's a parking garage more proximate to our hotel that we currently park in. But the dynamic in Boston for parking is one that overnight parking availability is actually pretty good.

Because especially in this particular market, where you have a transient population that comes in for work and then leaves. So I mean, I know we've reevaluated our parking contract in Boston since -- during our period of ownership, and we have switched garages. But to the best of my knowledge, I don't believe we're parking in that garage at this time.

Great. Thank you.

We'll take our next question from Shaun Kelley with Bank of America.

Good morning. Thank you for taking my question. I was just curious on -- we continue to see independent hotels remain a big theme for a lot of your REIT peers in terms of acquisitions. And I am curious, outside of the Park Plaza, the profile of Sunstone is still heavily mixed toward the brand. A strategic level, how do you think about that today, and where do you want to take your mix over time?

Yes, good morning, Shaun. It's Robert.

I think what you'll see from us, and if you look across the spectrum of assets that we've looked at in the last 12 months, it's been a mix of branded hotels, as well as independent hotels. In super high barriers to entry market, very high compression markets, we are still a believer in both branded hotels as well as independent hotels. So the -- looking at our portfolio, it's obviously very heavily branded, or brand-weighted versus independent, but don't take that as an indication that we don't have an appetite or we're less interested. Our acquisition focus is very much on very high compression, super urban, so to speak.

And in those markets, we do feel that there is a very viable place for independents, especially when you look at the true cost of a brand. John was speaking before about some of the valuation we've done on the Boston Park Plaza, as it relates to potentially adding a brand. And definitely, one of the factors that has played into that, is when you really truly fully load the P&L with all the brand costs, you have to really have confidence that the brand is going to deliver an incremental -- a meaningful amount of incremental money to pay for itself.

That's really helpful. I appreciate the color.

And my follow-up would just be, we've heard some people talk about San Francisco, and the renovation of the Moscone Center, particularly the impact on some larger group hotels. You obviously have a big group hotel. But you are also in the midst of ramping that asset. So can you tell us how you see the off play on that particularly in the second half of 2015, when I think the convention centers there peak renovation?

Sure. As far as our hotel goes, we're currently ahead of pace for a full year by 23.6%, with 18% of that coming in rooms, and almost 4.8% in rate. Given where we typically play in the citywides, the lack of citywide compression due to some of the openings of construction on the convention center, does put some pressure on the transient rate. That being said, we're comfortable where we are.

The number of group rooms do soften a little bit in the back half of the year. But it's also the strongest transient demand between June through November. So given the transient demand, given the increase in both mid week business and weekend travel, we think that our hotel will work its way through the market very well. And as I said, we think San Francisco is a strong double-digit environment for us this year, and probably a double-digit or close to a double-digit environment next year.

Great, thank you, everyone.

Thank, Sean.

We'll take our next question from Lukas Hartwich with Green Street Advisors.

Thank you, good morning.

Hey, Lukas.

John, you mentioned that your turnaround assets are materially outperforming your underwriting. Can you quantify that a bit?

Sure, I'm going to hand this over to Robert. But if you take a look at for example, our 2015 multiple on our total investment thus far in San Francisco, [2015] would be 11.8 times EBITDA. That includes renovation disruption in it. Wailea, we are down to 14.9. So we've seen pretty significant growth out of these two hotels that have materially outperformed underwriting. Well, I probably just took all of Robert's thunder, but I'll pass it along for any color commentary.

Yes, no. I mean generally speaking, looking at the three recent larger acquisitions, Boston Park Plaza, from a top line perspective is generally in line, a little bit, a small amount of outperformance on the top line in Boston Park Plaza. Looking at Hyatt San Francisco, the differential is a little bit more, actually. Sorry, I'm just comparing a couple numbers, give or take about $10 in RevPAR in 2015, more than we expected.

And then, when you go to Marriott Wailea, that's where the real outperformance has been a lot stronger. Frankly, there was more low-hanging fruit on the revenue and sales side than we expected. I'd love to say that it's something more scientific than that.

But really, as we went through and looked at how the hotel was addressing both its sales strategy, its approach to group and revenue management. We were able to move the needle there a lot more, obviously helped by dropping oil prices, which dropped airline fares, which has helped inbound traffic into Maui. But there the outperformance underwriting is really closer to $25 in RevPAR.

That's really helpful. And Rob, one follow-up on that, the Hyatt in San Francisco, the margins in that property are in the low 20% range. I'm just curious, what's sort of upside do you see in those margins?

In San Francisco, it's -- we're -- in San Francisco, we're in it, as everyone understands, we're in a very union environment, and with that comes a heavy cost structure. So to achieve our business plan there, we would -- compared to current margins, we really see it getting to the mid 20s%, versus the low 20%s where it is now.

That's very helpful. And then, I have got one Marc. Marc, can you remind us why margin growth is, the mid-point is below100 basis points, even though RevPAR growth feels like it has come in pretty strong?

Yes, the same-store portfolio for 2015 margins are, 0 to 30 basis points up from the prior peak of 30.6[%] We're expecting to achieve peak margins in 2015. There are some additional costs that really end up in real estate taxes more than anything, and in New York City, the drag on GOP. So if you really carve out the real estate taxes, and the -- in New York City, the rest of the portfolio looks to be very strong.

Great, that's very helpful, thank you.

We'll take our next question from Nikhil Bhalla with FBR.

Hi, good morning, John. Just wanted to get a sense of, what do you think the [lender] cycle is, or at least what you are assuming as you think about your asset sales, and some of the programs that you kind of talked about? We'd love to get some sense of that.

Nikhil, that's obviously a very, very important question, and one that nobody really knows the answer to. I think there are a significant number of potential outcomes. I think the more -- this is just me talking -- but I think the most likely outcome, I've been saying this for years, is we see softer growth in this recovery. But this recovery is longer as supply is muted, and GDP has not been as strong. It kind of feels like a -- instead of a white hot growth, it kind of feels like it's just continuing to slowly build steam.

I think that type of environment which would result in relatively low interest rates for longer periods of time, I think bodes well for our business. So putting all of that together, I would expect that -- while we might not see some of that white hot growth in the middle part of the recovery, I do believe that this recovery is longer than is typical, which I think is pretty healthy.

And really the most important question, or one of the more important questions I should say, is what does the next downturn look like? And while nobody knows, I think it's more likely than not, that the next downturn is far less severe than what we've just experienced the last two downturns, and what does that mean to real estate pricing or hotel pricing?

Sure. So I got it from what you're saying. You think that we're still in the cycle at this point in time?

I think that's fair. I think that's fair. Remember that pricing can continue to increase, we've seen parts of the cycle before, where pricing can continue to increase, even in declining occupancy, because we are over some natural occupancy level, where there continues to be enough tension in the pricing market. Or in the ability to move rates.

Sure.

So I think there are some people that take a knee-jerk reaction, that as soon as occupancy starts declining, ADR will as well. And we just don't share that view.

Sure. You mentioned about the (inaudible) there -- my question to you is why not look to sell the Company to one of your other peers?

Why not look to sell the Company to a peer? Well, that's obviously a Board decision. But we're -- any way to maximize shareholder value, we will look at it.

Okay. Thank you for that. And one final question for Bryan here. Byran, the restricted circumstance balance, $87 million, can you just give us some color on what's included in that?

Good morning, Nikhil. The majority of that would be the FF&E reserves, which are -- we will draw down on, and then are replenished on a monthly basis. I believe that's somewhere around $50 million of that balance. There are some seasonality reserves and other things that are dictated by the individual mortgages.

And then other, the other amount would be then the amount that's filling the interest payment for the next month. Also included in that would be real estate taxes that are reserved on a monthly basis to prepay upcoming real estate taxes.

Got it. That's all for me. Thank you very much.

Thanks, Nikhil.

We'll take our next question comes from Smedes Rose with Citi.

Hey, this Archa on for Smedes. Quick question on Wailea. So is it fairly reasonable to think of there being significant disruption in 2016? It feels like -- I know you talked about completing the majority of the renovation of the resort's public spaces, but it sounds like that's key to the hotel. So if you could provide some context around that, that might be helpful?

Yes, Archa, this is John.

We really aren't providing 2016 guidance at this point. I think what we've talked about in the past, really is just some disruption around the pool renovations in Wailea. If we can accelerate some of that, we might take some of that on in fourth quarter of this year, just depending on when we have the best opportunity to get that done.

In addition to that, we'll continue to have some renovation disruption at the Boston Park Plaza when we're finalizing those rooms. And other than that, I really don't see really anything else in our portfolio. And at that point, our portfolio is in really good shape.

Okay, thanks.

So as the year goes on, we'll provide more disclosure on what we anticipate that number to be. But keep it in the context, that we're talking about this year $3 million to $5 million of revenue displacement. And that's maybe 30 or 40 basis points of RevPAR, on a Company that this year, will do roughly $1.25 billion in total revenues. So you really take a look at that in a historic context, or an absolute context, it's really not all that much.

Got it. Okay.

And given that these heavy lifting projects are now performing better than the underwriting, and given your earlier comments on the strength of the bids, can you talk to the potential of probably doing another heavy lifting or transformative deal in 2016?

Potentially. Again, it really comes down to pricing. It comes down to our human capital. It comes down to whether or not the markets and our investor base has gotten comfortable with our ability to execute on those plans, which we feel comfortable, we feel very confident will be the case. We look forward to highlight those capabilities when we all get together, as many people as possible, coming up at our Investor meeting at Boston Park Plaza, at which we'll also be highlighting our plans for Maui.

While Boston is, a good portion of that renovation is done, and we are -- while it's performing well, we are most excited about where that asset can go, particularly after the rooms are done. We feel very, very good about Wailea, and if we can prove that we have that ability, and the investment community buys into that, then I think incremental value add will be on the table. Too tough to make that call right now.

Okay, great. Thanks for the color.

Thank you.

And that does conclude our Q&A session. I'll turn it back to our presenters, for any closing remarks.

Well, we really appreciate everybody's time and interest in the Company, and please give anyone of us a call, if we can add any further details. Have a great day.

And that does conclude today's conference call. We appreciate your participation.