Good afternoon, ladies and gentlemen. Welcome to the Sunstone Hotel Investors' second quarter 2009 earnings conference call. (Operator Instructions). Now, I would like to turn the conference over to Mr. Bryan Giglia, Vice President of Corporate Finance of Sunstone Hotel Investors. Please go ahead, sir. Thank you. Good afternoon, everyone and thank you for joining us today. By now, you should have all received a copy of our earnings release and 10-Q which was released this afternoon. If you do not yet have a copy, you can access it on the Investor Relations tab on our website at www.sunstonehotels.com. Before we begin this conference, 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 EBITDA, adjusted EBITDA, FFO, adjusted FFO, and hotel operating margins. We are providing that information as a supplement to information prepared in accordance with Generally Accepted Accounting Principles. With us today are Art Buser, President and Chief Executive Officer, and Ken Cruse, Chief Financial Officer. To begin our discussion, I'd like to turn the call over to Art. Please go ahead.

Good afternoon, everybody, and thanks for joining us today. During today's call, we're going to cover six topics. First, are going to review recent hotel disposition. Second, I'll review RevPAR and demand trends. Finally, I'll discuss efficiency measures. Ken is then going to review our recently completed finance transactions, provide an update on our secure debt negotiations, and finally, we'll review our liquidity and credit statistics. At the end of the call as always we'll be available to address any unanswered questions. We have had a very, very productive, albeit somewhat complicated second quarter. During the quarter, we completed more than $370 million of transactions, which helped to meaningfully transform the company, including a senior notes tender and consent, an equity offering, several asset sales, corporate reorganization, credit facility restructuring, and we initiated a secured debt restructuring program. At the same time, we kept our eye on the ball as our operating statistics in terms of RevPAR and margins were largely in line with our peers. We also incurred $133.8 million of one-time and other charges, some of which did affect our EBITDA and FFO, which came in below market consensus. The aforementioned transactions were aimed at increasing our liquidity and long-term stability, albeit at a cost of our short-terms earnings. For example, we incurred nearly $1 million in expenses related to corporate and property level reorganization, which will result in the long term in a much more efficient operations going forward. Although we meaningfully increased our cash position as a result of our non-core asset sales, we also gave up the EBITDA associated with those properties. In addition, how this also was impacted was with some negative trends at some of our larger markets, including New York and San Francisco where RevPAR was down 31% and 34% respectively, with…

Great. Thanks a lot, Art. Good afternoon, everyone and thank you for joining us today. Today, I'll cover three topics. First, I'll provide a comprehensive review of our recent finance transactions and secured debt initiatives. Next, I'll review the one-time or unique items that affected our financial statements this quarter. Finally, I'll review our liquidity and credit statistics. As Art mentioned, this was a very productive quarter for us with $370 million of transactions, which we believe will be very good for the company in the long run, but which also created a lot of noise during the quarter, and contributed to the $133.8 million of one-time and other expenses we booked during the quarter. As Art mentioned, our transactions this quarter included the repurchase of $123.5 million of our exchangeable notes, $100 million equity offering, and $85 million credit facility amendment, and $64 million of asset sales. Through these transactions, we increased our total cash position by more than $66 million to $240 million from $174 million last quarter. We also decreased our indebtedness by 8% or $127 million from $1.645 billion to $1.518 billion, with an additional $94 million of secured debt related to the W San Diego and Westchester Renaissance, currently subject to selected default pending either deed back or significant terms modification. We also increased our financial flexibility by significantly reducing the covenants contained in our credit facility and our exchangeable notes and venture. Let me walk you through the specifics of each of these of these transactions. First of all, the exchangeable notes repurchases. In May, we successfully completed the tender offer for $123.5 million face value of our exchangeable notes for just $86.5 million in cash or at 30% discount to par. During the first quarter, we repurchased $64 million of the notes in…

Thanks, Ken. It's easy in this current environment to throw your hands up in the air and can see to the overpowering economic headwinds and sit and wait for the economy to improve. Clearly, that's not how we run our business. We exist to outperform. Over the last quarter, we have improved our balance sheet to allow our company to emerge from this phase of the cycle in a position of strength. While we generally performed in line with our peers this quarter, that's not good enough for us. We made decisions over the long run that will position us to outperform. We carefully examined every aspect of our operation and made difficult, but appropriate adjustments at both the property and corporate levels. We rebalanced our capital structure buying back debt at a significant discount, issuing equity, amending our credit facility, divesting of non-core assets, reducing our overall liquidity. Last, we're actively addressing our secured debt portfolio with a realistic valuation and a willingness to walk away from assets if we're unable to restructure its debt. This is not a process we take lightly, but we truly believe that the difficult decisions we make now will position Sunstone to be truly best in class. In closing, I want you to know I take comfort in -- and I'm optimistic about three things. First, the economic cycle will improve and the hotel industry is highly linked to its recovery. Two, the hotel industry is positioned for an accelerated recovery with muted supply and outsized profit growth as evidenced by our D. C. Renaissance. Savvy owners can achieve increased revenue and decrease the expenses. Three, I'm optimistic about our company. We are leveraged for the recovery. 5.6% long-term debt is like California coast, they're just not making any of that anymore, and I'm mostly confident in this company because of the people in it. People make the difference in the hotel business, and in the business of hotels. I've said from the first call I was on a year ago, Sunstone has a Super Bowl quality team. A year ago there were 47 people here, now there's 27, and yet I'd say, we're accomplishing more now. That speaks volumes to the strength of character, the true excellence in execution I see at our office. I see that same level of excellence at our hotels that are making equally hard choices, staying open to new ideas, success today requires adaptability and non-defensive outlook. We are fortunate to have such people. With that, I'd like to open the call to questions. So operator, please go ahead.

Thank you, sir. Ladies and gentlemen, we'll now begin the question-and-answer session. (Operator Instructions). Our first question comes from the line of David Loeb with Robert W. Baird. Please go ahead.

Hi, Ken. On the first topic, you mentioned three hotels that were not covering their debt service. Is that excluding the W or including the W?

That's inclusive of the W.

Inclusive of the W?

Correct.

For you guys to actually do a mid-year impairment, my understanding of the accounting is that, it takes a lot to get you to do that. I certainly understand the sensitivity of not talking about which assets you're not covering debt service or not talking about which assets may go back to lenders that you're referring to, but just trying to read the tea leaves here, you took impairments on three assets, one of which you decided to stop subsidizing interest. Can you talk a little bit more about the circumstances surrounding Marriott Del Mar, Marriott Ontario and why you chose to take those impairments? Did you eliminate all of the equity investment in those assets?

Sure. Good question. First of all, our impairment analysis is done in accordance with FAS 144. You're absolutely right, it's required to be done once per year, but if conditions or circumstances warrant, companies are advised to run that more frequently than just once per year. So, we've been running it every quarter. We have a very standardized approach for our 144 analysis. We treat every asset essentially equally. We try not to cherry-pick or isolate specific assets, and develop a specific set of assumptions associated with those assets. I think you can draw some conclusions in terms of how those operations are performing since they did fall off the analysis, but I will tell you, we did not specifically identify or isolate those assets when we ran the analysis.

So is there any equity left above Ontario, for example, above the $25.7 million mortgage or Del Mar above the $48 million mortgage?

I mentioned in my comments, we don't want to talk specifically about transactions other than what I said in the prepared remarks. There are a couple of reasons. It could impair our ability to negotiate new deal terms on the debt.

I understand that. I was really trying to approach it from the other side, which is impairment, and if you can't talk to that either, I understand that.

Yes. We don't want to give any additional specifics there.

One more if I may. On the Series C preferred stock, and the risk of the financial ratio violation. I gather you don't expect to have a lot of taxable income anyway, but this could clearly limit your ability to pay common stock dividends. Might it under some circumstances impair your REIT status? Might it call into question your ability to pay required distributions?

We're still able to make distributions required to meet our REIT status or to maintain our REIT status.

So the restriction is, you can't pay anything more than REIT status?

Correct.

You said in here that you may incur a 50 basis point per quarter dividend increase.

Under the terms of the agreement we would.

So if you violate in the second half, you will be paying 50 basis points more per quarter?

Correct.

That's all I have for right now. Thanks.

Our next question comes from the line of David Katz with Oppenheimer. Please go ahead.

Hi. Can we split the business a little bit between leisure versus group versus transient, and just spend a moment talking about what you're seeing in those different business lines? How that has evolved and sequentially, I guess, is probably the best way to look at it?

Sure. David, do you want me to talk about year-to-date or just for the quarter?

Both.

What we're generally seeing is, at business traveler, there's both a reduction in occupied room, clearly a reduction in rate. In leisure, there has been a pickup in the second quarter in terms of the number of guests. In fact, occupied rooms are up year-over-year, but that's been done at a discount. So, when our leisure revenue is off, it's really lower ADR, higher number of occupied rooms. In terms of group business, group demand is down 16, and kind of looking forward, our pace is also down 20%. The other smaller piece of our business, government demand is up 9%, and that is really a function of, again, lower rate, but much higher occupied rooms because, again, there's certainly been increased demand nationwide for government business.

Can we go back to the group piece for one second? You know, we've heard from quite a few companies this week already talking about some improvement in some of the metrics they track on group, and some of that may also be just their expectation that attrition rates may ease next year and some of the traffic patterns may improve. Do you have a view about that?

Attrition rate and booking window, people have talked about a lot, and candidly, the booking window has been decreasing since 2001 or 2002, and we've looked at our booking window for our assets. Candidly, it's all over the math. There are some where the booking window is decreased 8%, there's some that there's 30%. The big houses still book business three years out. The smaller hotels that have more of the corporate business traveler are booked closer in and probably have a higher degree of variability. In terms of attrition or people talk about wash. At the peak of the market wash was 10%. A lot of hotels now are looking at attrition that they're experiencing at 20%. Overall, when I take a look at the wash factor, and the booking window, is that a couple hundred basis points in terms of impact on what your pace is? Maybe it is. I don't look at it as saying, well, but for those things the pace would be a lot better.

One more. I just want to clarify on the analysis or highlighting the list of hotels that you would characterize as not cash flowing, and I assume, if I heard correctly you're comparing EBITDA with the debt service, right? Are taxes included, excluded, are we looking really at cash versus cash?

We're looking at cash versus cash on that analysis and just to be clear, that's a trailing 12 month analysis.

That's trailing 12 months, so you're not taking any forward-looking view on it at all, which presumably might, I guess in aggregate that cash flow might be going down in the next four quarters, but there could be circumstances where it might be going back up?

Right.

For another.

There's also seasonality involved in there as well kind of quarter-to-quarter.

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

Most of my questions actually were answered, by two predecessors there, but just had one question relating to dispositions. I mean are there any markets if you were to fall below coverage on that where you would keep the asset just as more of a strategic decision or are all assets at this point under evaluation if they fall below coverage?

Yeah, again, Mike, I'd refer you to our previous calls. What we really look at is, it's less of a market issue and more of the three tests, as it cover the existing debt service and we feel it falls below, the value of the asset falls below that of the debt and so the market or the submarket certainly as evidenced by the W, where San Diego is down some, but the RevPAR index of that hotel is falling from 130 to 80. There's a case where, San Diego is a great long-term market, it's been hit by a lot of new supply, and it has good group demand, transient demand, and leisure demand. But that submarket within the San Diego market was even hit harder. It's less of a market issue and just more of kind of performance in the context of that debt.

Just to be clear, are you guys still holding the W right now, that has not been taken back by the CMBS group?

That's right.

Thank you. Our next question is from the line of Joe Greff with JPMorgan. Please go ahead.

Most of my questions have been addressed. Just one final one, maybe kind of an odd one, hopefully you can answer it. If you look at your current 38 properties in your portfolio, what was the peak EBITDA on that in the aggregate?

You want to know the peak EBITDA for the 39 hotel portfolio?

Yes.

Hold on. Let us look into our little schedule here.

Do you have a second question while we're looking that up, Joe?

No. That was it, guys.

About 250. $250million.

Our next question is a follow-up from the line of David Loeb with Robert W. Baird. Please go ahead.

Just had one, Art, you mentioned trying to balance rate and occupancy and working to maximize the cash flow. On Host's call this morning they talked about New York where occupancies remain very high, but whenever they try to cut rate, they just lose massive amounts of business and that trade-off doesn't really work. Can you give a little bit more color about your tests of that and which markets are more price sensitive and which were lesser, what some of the characteristics are that might lead you to be able to maximize profit and lose a little market share and where you might not be able to do that?

New York is one of those markets where rate shopping is done very competitively, and if you're too far out of the line, you could lose a lot of occupancy. We always say in Times Square, you're always going to fill, it's just a question at what rate. What we've asked our operators to do is, listen, we're not going to hold you to RevPAR index tests this quarter, that's one of our main dashboard items. Instead, maximize NOI, hold rate and let the occupancy fall-off and see if, in fact, you're in a better spot in terms of cash flow. You really need to do that after over a 30, 60, 90-day period and you pretty quickly get a sense of kind of just watching I mean, it's a bit like the stock market. You're watching electronically and since about a third of our business comes over the Internet, you get a real quick sense of what prices are getting hit, what prices aren't and you can see kind of, which markets have a little bit of a gap where the customers going to actually pay more for something and which ones where if you stick $5 out, you're not going to get anything at all. It has some to do with demand, being occupancy, but some of it has to do with kind of, is the product that much different than others in the Rochester market, for example, is a market where we see that there are customers willing to pay a certain price, who want a certain kind of product. As we mentioned, New York is a market where varies, there are times where you see that, but another times when that's clearly not -- clearly not the case.

The bottom line in this experiment is you're moving down this road, but it's not like you think you can do a whole lot better than what you've done with previous positioning of these assets. Am I reading you right on that?

Across our portfolio, don't expect that half or even a quarter of our hotels are going to be able to do this. We just feel in a face of ever declining ADRs someone has to be the first to try to hold rate because in a constant face of rates going down, there has to be an effort to try to hold rates and we're trying to find which markets, is that really a sensible strategy and which ones are you going to get no business at all and it doesn't make sense. It's not going to be material to our business, but we're hoping to find a couple of markets where that holds and makes a difference in the performance for that hotel.

That's very helpful. Thank you and clearly you're not afraid of being first.

Thanks, David.

Yeah, David, this is Ken. I wanted to follow-up on your earlier question. You asked the question about our impairment analysis and what that implied in terms of the book equity of those assets. You can actually get to those details on our filing, so let me walk you through the math a little bit, but what I would caution you and the listeners to remember, to bear into mind, we're very careful not to make long-term decisions based on short-term conditions, but based on our impairment analysis, we are required to mark those assets down to current fair market value, valuations. Once again, we don't necessarily believe that the current spot market is representative of the true future potential for the assets.

Right. But to some degree, Ken, just to make sure I'm understanding that, your assessment of current fair market value and your need to do that test, it's a very long-term analysis, right? It's permanent impairment basically?

The test has a couple of different screens. The first level is the recoverability test. It is what you've got on the books for the asset recoverable and we look at that based on an undiscounted stream of cash flows for the asset. As I mentioned in my earlier comments, we're very conservative and very consistent in how we apply that first test. So, we have a very low growth rate, very low flow through rates for each of the assets, and we try not to be specific in terms of setting up different assumptions for different assets. So the result is, in a trough situation, you do have assets that run up against that test, and as we mentioned, we had three assets this quarter in our ongoing portfolio that failed the test. If you fail that [CLIF] test or the recoverability test, then you mark it to fair value. The fair value analysis, again, is based on current market conditions. So, if you look at the numbers that we gave you today on the Del Mar Marriott , for example, we marked that down by $25.4 million. The debt on that asset is $48.5 million. So, our current book value of the asset is about 38, 38.8 is what we've got it on the books for. Ontario Marriott, we took a $9 million impairment charge on. The debt on that asset is $26.5 million. We've got it now as a book value of $16.5 million. Then finally on the Westchester Renaissance. Debt on the asset as I mentioned on the call was $29.5 million, and we took an impairment of $30 million. Our current book value is $24.4 million.

So in Westchester, for example, assuming you eventually dispose of that, you'd actually have a $5.1 million gain?

Yeah. At this point, we'd book a gain.

That actually helps a lot. Thank you very much for coming back to that.

Our next question comes from the line of Ryan Meliker with Morgan Stanley. Please go ahead.

Just a quick question for you regarding how are you guys are calculating your long-term value of hotels that you might be potentially returning to lenders. I'm sure you can't provide a lot of detail, but if you can give some methodology, that would be helpful. I was also curious on what your thoughts are if a property may not be generating negative debt service coverage, but is immaterial overall, but your long-term value of the asset is below the loan value, would you consider giving those back as well? Thanks.

We can't say we've come across an asset yet, never say never where it's not meeting debt service but it's value is below the long-term value of the loan. Again, the screens we're using are that it must meet both. To your first question, yes, it really varies greatly market by market. Again, the W is the best known one, and there is a market where we have belief in long-term, you just add the number of rooms that are there and kind of look at how long will it take for those rooms to be absorbed. I am giving you more methodology than numbers, but kind of looking at how many years is it going to take for market occupancy to get to a point where there's going to be rate pressure where you're going to start to see that come up, and then rate come with, and you get back to what were peak numbers kind of for San Diego more late '06, early '07. For that market, again, it's much more of a supply issue than it is a economic engine issue. While we look at the overall macro numbers, it is really much more market driven based on the supply and the economic engine.

So it sounds like you're doing something more along the lines of a DCF than a rooms revenue multiplier or anything like that?

Yes. We look at all those metrics, but at the end, we look at it mostly in a DCF.

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

Just one quick point of clarification, please. The Westchester property, that's part of the 39 ongoing properties? - KeyBanc: Just one quick point of clarification, please. The Westchester property, that's part of the 39 ongoing properties?

Yes.

Is it not in the same category as the W which is not part of the 39? - KeyBanc: Is it not in the same category as the W which is not part of the 39?

The W because, we defaulted and as we noted in our comments, we have concluded that we are no longer going to negotiate with the special servicer, and we are working with them to accommodate a deed back. The W fell into a category of assets held for non-sale. Westchester is not currently in that category. We're hopeful that we're going to work through an amicable resolution on that deal rather than do a deed back.

You'll continue to operate it. Did their numbers in the second quarter and the third quarter flow through the normal part of the income statement? - KeyBanc: You'll continue to operate it. Did their numbers in the second quarter and the third quarter flow through the normal part of the income statement?

Yes. Correct.

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

Good afternoon, guys. Ken, I guess considering that mark-to-market test you were just describing, I think it was David. In determining that fair market value, can you just talk about maybe some of the approaches, you put more or less emphasis on whether it's DCF or EBITDA?

As Art said on the last question, it's done asset by asset. We do a full model of the operations of each hotel, so we model out all the departments of each hotel in fact when we do these models. Then we do a 10 year model, and it's a DCF based calculation. We also factor into that model though any future CapEx needs for the asset, and present value of add back as well. Our cap rate is based on our expected cost to capital plus a hurdle rate minus the growth rate in the year of aversion. So, we have a fairly standardized approach in terms of coming up with the valuation, but the assumptions for each asset are very different depending on market conditions.

That's helpful. I just wanted to be clear. Can you share with us maybe what the range of discount rates that you typically use in that DCF over that time horizon? Just to be clear, is that an unleveraged or leveraged analysis?

It's an unleveraged analysis, and we tend to use a mid-teens to upper teens discount rate.

Do you ever give any consideration to a leveraged analysis of these?

If you can tell me what that's going to cost, we'll start running leveraged analysis. We've always wanted to run these analyses based on the characteristics of the asset themselves. We do a real estate evaluation, and we look at that on an unleveraged basis. Then, once we're ready to close on a deal, we'll layer in the benefits of the leverage so to speak.

Just switching gears, I think earlier you were talking about how you were trying to test in certain markets about whether or not you had pricing power. I know every day is different effectively for every hotel and every market is different, but when you look on a very macro level, the top 25 hotel markets are going to see not only supply growth in '09, very likely going to see continued 3% plus supply growth in 2010. Do you really think we're at a point that you can really be pushing that sort of pricing power test considering the supply outlook, and also giving that we're running at occupancy levels that are frankly so much below where they've been historically? Is it too early to be trying that I guess?

Never too early to try. You're right, when you look at the US on a macro level, particularly with those drivers, the answer would be why you would try that. The reality is the average only tells you the average. There were some markets who had more demand in the month of June than they did the year before. So, it's really week-by-week, street corner by street corner, and that's why revenue managers, that job is so important, because you are watching the tape practically to kind of look at how things trade, and there are some markets where, okay, there's not price resistance, let's move up a little more and see what happens. Listen I'm not talking about a sea change, but I am talking about there are submarkets within certain markets. We even see that within one market, in one submarket of a market, there's pricing power and in another place there's not that you really have to play it on an isolated basis. I'm not calling the end of rate decline for the US market yet.

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

I joined the call a little bit late. Sorry, if you've already addressed this. Can you maybe give us some general color on what, if anything, has changed in the last three months or so in terms of buyers? How their underwriting hotels, and what they're looking for in capital structure and maybe you could reference to one of the three I think you've sold to-date? Do they see something different for the asset or is it a financial transaction or what are they seeing, what are they trying to get out of it?

Chris, in all the cases totally different reasons, most cases either all cash or recourse debt. I would say in all cases what the three buyers had in common, they had a very specific idea, use, cost of capital vision that met with that hotel uniquely. It wasn't as if there was a broad pool of people that had kind of similar views. Buying universe is still very thin, underwriting techniques and values still come up with widely varied answers. No one is counting on debt. We didn't in particular count on anybody who said they needed debt at closing unless there was recourse, we knew they weren't going to be there. I think the other thing in common is clear these were all smaller transactions, getting things done 30, 20 million and under is possible, but, everyone is loath to place large sums of money and it's funny, 2007 people would have said if it's not 250 million, don't call me because I only want to place money in large pools. Now people want to be below 25 million because they want to make small metered debts. The other thing they all have in common is seven years, six years, five years from now, they believe their hotels are going to be worth a lot more money and in the interim they don't really have any pressure to show any kind of earnings growth and they're prepared for down drafts in earnings as evidenced by Atlanta where it's trading at a 20 multiple. Clearly, that was bought with a vision that they're going to greatly increase operations and profitability over the long run.

Just a follow up on pricing. We all [tend to dismiss travel] conference in the last few days and, I think they kind of made the point that in a lot of markets it's one hotel or two hotels that kind of, we'll call them the weaker links that tend to lead the whole market down and cause the higher quality hotels to follow suite. Do you guys agree with that? I know it's going to be market-specific, but is that generally true? How do you think about that, if you do try to push on the way up, do they follow you or do they fight back with lower rates?

Generally speaking concepts five or six hotels, number five and number six are the ones where their only competitive advantage is price and they keep going south and, again, this is where you have to watch the tape. They keep going south until they start pulling away business from others. On the way up, I mean what we're very focused on is the higher you remain, the higher you're going to get on the next cycle. I think, Four Seasons proved that on one of the past cycles where particularly the New York Four Seasons where they kept rates and it got, made it a lot easier to get the $700 or $800 and somebody who cut their rate in half. We think about it the same way, but again, it all comes down to if that weaker competitor offers such a cheap deal that they basically suck all the business out and there's no extra demand, then you've got to make that profit decision if you're going to play in that game [it is a real through channels] or another way that you don't lose all or the majority of the business.

At this time there are no further questions. I'd like to turn it back to management for any closing remarks.

Okay. I appreciate everybody listening in today. This was a very complicated quarter. I appreciate all the questions and our opportunity to give clarification. I'm very proud of what this team has done and look forward to our next inter-quarter call in the next 60 days. Thank you very much.

Thank you.

Thank you, sir. Ladies and gentlemen, that does conclude our conference for today. Thank you very much for your participation and for using ACT conferencing. You may now disconnect.