Sunstone Hotel Investors, Inc. (SHO) Q2 2012 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Welcome to the Sunstone Hotel Investors Second Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded today, Friday, August 3, 2012. I'd now like to turn the conference over to Bryan Giglia, Senior Vice President of Corporate Finance of Sunstone Hotel Investors. Please go ahead, sir.

Thank you, John. Good morning, everyone, and thank you for joining us today. By now, you should have all received a copy of our second quarter's earnings release and our supplemental, which were released yesterday after the market closed. If you do not yet have a copy, you can access it on our website at www.sunstonehotels.com. Before we begin this call, I'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 EBITDA margins. We are providing that information as a supplement to information prepared in accordance with Generally Accepted Accounting Principles. With us on the call today are: Ken Cruse, President and Chief Executive Officer; Marc Hoffman, Chief Operating Officer; and John Arabia, Chief Financial Officer. After our prepared remarks, the team will be available to answer your questions. I'd like to turn the call over to Ken. Ken, please go ahead.

Thanks, Brian, and thank you all for joining us today. On today's call, I'll start by reviewing some of the high points from our second quarter. I'll then discuss our recent transaction activity. And finally, I'll provide our perspective on industry fundamentals and Sunstone's positioning. Marc will then cover operations in detail, and John will discuss our balance sheet and finance transactions, as well as our updated guidance before I conclude our prepared remarks and open up the call to questions. To start, we're pleased with our Q2 results, which came in above the high end of guidance and Street consensus. As compared to Q2 of 2011, our comparable RevPAR growth accelerated in the quarter, improving by 7.6% to nearly $143. Our comparable hotel EBITDA margins improved by 110 basis points to 32.6%. And when considered on a same-store basis, our Q2 margins were just 100 basis points below by our peak levels achieved in 2008, implying that as the recovery ensues, our portfolio is on track to materially exceed prior peak EBITDA production. Our adjusted corporate EBITDA improved by approximately 12% in the quarter to $71.1 million and our adjusted FFO per diluted share improved by approximately 17% to $0.35. And as compared to Q2 2011, our consolidated debt to total booked capitalization improved by 910 basis points to 43.8%. In short, our ongoing focus on proactive asset management, smart reinvestments into our portfolio are helping to drive solid improvements in our operating performance. In addition to our intense focus on operations, we continue to execute on other aspects of our business plan as well. As we stated before, our overall goal is to achieve industry-leading stockholder returns by improving our portfolio quality and scale, while gradually deleveraging our balance sheet. During and after the quarter, we have taken a number of positive steps in this direction. First, in June we closed on our acquisition of the 417-room Hyatt Chicago Magnificent Mile. We completed a master plan for this hotel, and we've initiated a comprehensive renovation program into positioning the Hyatt as one of downtown Chicago's top business transient facilities. The renovation will be complete next summer and will result in a complete redefinition of the hotel's restaurant and bar, public spaces, meeting spaces and guest rooms. The renovation will result in a net addition of 2 keys, bringing the hotel to a total of 419 keys when complete. Second, in July we closed on our acquisition of our third downtown Chicago asset, the 357-room Hilton Garden Inn Chicago Downtown/Magnificent Mile. The hotel's strong urban location, superior RevPAR and EBITDA per key, efficient urban, select service model and close proximity to our other downtown Chicago hotels make this a highly complementary addition to our portfolio. As previously announced, we're proceeding with our plan to capitalize on meaningful synergies across our 3 hotel Magnificent Mile portfolio through coordinated revenue management and by combining operations management of the Hilton Garden Inn with our Embassy Suites Chicago, which is located directly across the street. From a portfolio perspective, the Hilton Garden Inn generated RevPAR of approximately $169 in Q2. This was roughly 20% higher than our portfolio average. As you may have seen when we announced the deal, the price of which we acquired the hotel was 11.7x 2012 forecasted EBITDA before adjusting for synergies with the Embassy Suites. This purchase multiple was a full turn below the EBITDA multiple at which we issued shares to fund the acquisition based on consensus estimates for our 2012 EBITDA. The third transaction we've recently completed is the previously announced sale of the 284-room Marriott Del Mar for $66 million. The transaction is in the final stages of rating agency approval, and we expect the sale to close within the next few weeks. This divestiture will eliminate approximately $47 million in mortgage debt and will improve our portfolio quality by removing a smaller, lower RevPAR hotel. From a portfolio perspective, the Del Mar Marriott generated RevPAR of $107.80 in Q2, which was roughly 24% below our portfolio average. The price at which we're selling the Marriott Del Mar equate to approximately 13.7x 2012 forecasted EBITDA, which is a full turn above EBITDA multiple at which Sunstone shares currently trade, based on consensus estimates for 2012 EBITDA. So these 3 transactions, 2 well-priced equity funded urban hotel acquisitions and 1 disposition and a highly leveraged, low RevPAR suburban hotel, are 100% consistent with our stated strategy of improving the quality and scale of our portfolio, while methodically deleveraging our balance sheet in a highly shareholder-friendly way. I'll spend a minute now on industry fundamentals. While it’s difficult to say how much stronger the U.S. lodging industry might have been absent the ongoing macroeconomic turbulence over the past 12 months, it is clear that the macroeconomic concerns have not translated into any measurable degradation of lodging industry fundamentals. In fact, industry fundamentals have remained highly constructive over the past year and continue to improve. Our belief that the lodging industry is in the first half of a potentially prolonged recovery is supported by the following: First, businesses are investing. Traditionally, U.S. corporate capital investing trends have been highly correlated to U.S. travel times. In short, the conditions that lead U.S. corporations to make investments in their businesses often also spur U.S. corporation to send their employees on the road to meet customers and drive commerce. Year-over-year, U.S. business capital investments were up 7.2% in Q2, following an increase of 5.4% in Q1. This is a positive harbinger for lodging demand. Second, groups are booking. Our portfolio produced more group per room nights booked for all future periods in the second quarter of 2012 than in any other second quarter in the past 5 years. For Q2 as compared to the second quarter of 2011, our group production increased 13.3% and our 2013 pace is now up 13.5%. Third, supply trends remain muted. Hotel supply is expected to grow by approximately 1% per annum till at least 2014, which is roughly 50% of the long-term average and materially below the supply levels that helped to magnify prior cyclical declines. In light of such muted supply trends, we expect both rate and occupancy to improve even if we see a moderation in growth of demand for lodging. And Finally, innovation will drive profit growth. We continue to work with our operators to implement new programs and initiatives throughout our portfolio and to driving operational efficiencies and greater profitability. Examples include, a portfolio-wide energy efficiency program we implemented in the first quarter, ongoing steps to consolidate and modernize food and beverage operations, and increasingly streamlined staffing models with respect to both labor and overhead. We continue to take meaningful steps to improve our portfolio quality and scale, while deleveraging our balance sheet in a shareholder-friendly way. Our balance plan is working as evidenced by Sunstone's material outperformance in terms of shareholder returns since our new leadership team was finalized last fall. And yet, we recognize we have a great deal of wood to chop to achieve our long-term objectives. Sunstone now enters very well positioned, institutional grade upper upscale portfolio. Our average hotel size is 415 keys. The majority of our hotels are recently renovated with strong appeal to business transient travelers, and our Asset Management team continues to find ways to drive profitability, while holding our operators accountable to achieving their goals, our primary exposures at the top urban growth centers in the U.S. And yet we continue to trade at a discount EBITDA multiple to most of our comparable peers in spite of our strong growth and attractive gearing in the context of what we believe will be a sustained U.S. lodging recovery. We see this as a material opportunity to deliver strong returns to our investors over the foreseeable future. We couldn't be more confident in our plan or ability to unlock Sunstone's full potential in terms of earnings growth and shareholder returns from this point forward. With that, I'll now turn the call to Marc Hoffman to discuss our portfolio operations in greater detail.

Thank you, Ken, and good morning, everyone. Thank you for joining us today. I will review our portfolio second quarter operating performance in greater detail and provide an update on our major 2012 CapEx projects. All hotel information discussed today, unless otherwise noted, is for our 32 Hotel portfolio, which includes, on a pro forma basis, all 2011 acquisitions, including the Doubletree Guest Suites Times Square, the JW Marriott New Orleans and the Hilton San Diego Bayfront, and includes on a pro forma basis, the 2012 acquisition of the Hilton Garden Inn Chicago Downtown/Magnificent Mile, which is not included in our earnings release since we did not acquire the hotel until after the quarter's end. The Hyatt Chicago, which is currently noncomparable, and the Marriott Del Mar are excluded. For the second quarter, our pro forma comparable portfolio RevPAR was up 7.7% to $143.53 driven by a 3.7% increase in occupancy and a 3.8% increase in ADR. 12 of our hotels generated double-digit RevPAR growth, including the Renaissance Orlando, Courtyard LAX, Hilton San Diego Bayfront and the Hilton North Houston, to name a few. From a total room segmentation standpoint in Q2, group revenues were up 8.9% with a 3.5% growth in ADR driven primarily by the Hilton San Diego Bayfront, Renaissance Orlando, Marriott Long Wharf and the JW Marriott New Orleans. Q2 transient-only room revenue increased a strong 7.7% to last year with a 4.6% increase in ADR. Q2 transient room revenue benefited from strength at the Fairmont Newport Beach, Hilton Times Square and Courtyard LAX, which was offset by weaknesses at the JW Marriott New Orleans, the Renaissance-LAX and The Kahler Grand. In 2002 -- in Q2, our hotels had 657 sellout nights compared to 496 sellout nights in the second quarter of 2011, showing the continued signs of strengthening demand in our portfolio. Similar to Q1, this is the highest number of sellouts in 5 years for Q2, indicating our portfolio is operating at occupancy levels that will enable our operators to continue to compress rates and capture a higher percentage of premium rated business going forward. Marriott Long Wharf Chicago Embassy suites and Courtyard LAX also had significant increase and sellout room nights. The Renaissance DC was able to achieve a RevPAR growth of 1.7% in the second quarter. This is stronger than the negative minus 17.5% experienced during the first quarter. We expect the second quarter to be the strongest quarter of the year for this hotel as Q3 and Q4 will be greatly impacted by the displacement from rooms and renovation from our -- and a soft D.C. market. The renovation is currently in full swing, which we expect to result in $3 million to $4 million of displacement during Q3 and Q4 of this year. 2013 is still looking strong in DC with group pace up 46.7%, and we continue to expect 2013 to be a stellar year at the DC Renaissance. The 12 hotels we completed significant renovations at in 2011 continue to ramp up nicely, with Q2 RevPAR up 11.4%. As many of these hotels completed the renovations in Q1 to Q4 last year, we expect to see continued comparable growth in the third quarter as we realize the return on our invested capital. As noted, our 2012 group pace is up 6.1% over 2011, with all the growth coming from additional group room nights. On a comparable portfolio basis, our group pace at the end of Q1 was up 7.7%. Our pace growth declined between Q1 and Q2 is because our hotels have less availability in the back half of the year. In Q2, our hotel group sales departments production for all current and future group bookings excluding the Hilton Garden Inn and the Hilton San Diego Bayfront was up 12.2% compared to Q2 last year, which is the highest group bookings in the last 4 years. Group production, including the Hilton San Diego Bayfront, was down minus 3.3%. As a mega hotel, the Hilton San Diego Bayfront is likely to have larger swings in group production from quarter-to-quarter that will skew our entire portfolio. Year-to-date, our comparable portfolio, including the Hilton San Diego Bayfront, is up 21.8% in group production. As an indication of both our operator's ability to compress business into higher-rated segments and the continued recovery in the business demand in the second quarter, our revenues from premium demand sources were strong with pro forma comparable revenues increasing 8.4% and the majority of that coming from ADR increasing 7.6% and premium room nights increasing 0.8%. As hotels continue to mix shift their business into higher-rated segments, our corporate negotiated business increased slightly, up 1.3% in Q2. We have continued to be more aggressive on both shifting out of the lower-rated channels, particularly the discount channels, as well as taking higher-rated business from these channels. We saw a 7.3% rate increase in our discount business in the second quarter. Our asset managers continue to work closely with our hotels and operators on a weekly basis to maximize hotel room strategies and profits through nimble rate and occupancy strategies depending upon the changing market conditions, street corner by street corner. In addition, we continue to work with all our hotel 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, do agree to those increases. Moving to CapEx. During the second quarter, we invested $26.7 million in our portfolio. For full year 2012, we expect to invest between $85 million and $100 million in the portfolio, including major renovations of the Renaissance Washington, D.C, Renaissance Westchester and the Hyatt Regency Newport Beach hotels. Two of our most significant investments will be the complete rooms, bathrooms and corridor renovation of the 807-room Renaissance Washington, D.C., which we are budgeting at $25 million, and the ordering and initial phase of the conversion of the Hyatt Chicago. The majority of the work for the Hyatt Chicago will be done in the first half of 2013. We'll begin to place this deposit and start some work towards the end of 2012. Overall, we expect to incur approximately $3 million to $5 million in renovation-related revenue displacement during 2012, which is roughly $1 million to $3 million higher than the displacement we incurred in 2011. With that, I'll turn the call over to John. John, go ahead.

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 leverage profile and recently completed and anticipated finance transactions; and third, details regarding our earnings guidance. With respect to liquidity, Sunstone ended the second quarter with approximately $278 million of cash, including $205 million of unrestricted cash. Subsequent to the end of the quarter, we closed on the acquisition of the 357-room Hilton Garden Inn Chicago for almost $92 million, resulting in the adjusted unrestricted cash balance of approximately $113 million. In addition to our strong cash position, we have an undrawn $150 million line of credit and 14 unencumbered assets including the Hyatt Chicago and the Hilton Garden Inn Chicago. In 2011, these unencumbered hotels collectively generated approximately $55 million of EBITDA. Our unrestricted cash balance exceeds the $58 million total of all of our debt maturities through 2015. At the end of the quarter, Sunstone had $1.48 billion of consolidated debt, which includes 100% of the $236 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 $1.42 billion. Our debt has a weighted average term to maturity of nearly 5 years and an average interest rate on all of our debt, including the effects of our interest rate derivative agreements is just under 5%. Our variable-rate debt as a percentage of total debt stands at 28%, and $58 million of debt maturing through early 2015 represents less than 2% of our current enterprise value. Over the past quarter, we made considerable progress towards our goal of reducing leverage in a methodical and shareholder-friendly manner. As a result of the repayment of the Long Beach Renaissance mortgage, the issuance of roughly $185 million of equity, and the acquisition of our 2 unlevered Chicago hotels, our ratio of net debt and preferred to trailing pro forma EBITDA now stands at 7x. This figure represents a 90 basis point reduction from where we stood at the end of the first quarter of 2012 and a 190 basis point reduction over the past year. Furthermore, we expect to end 2012 with a ratio of net debt and preferred EBITDA of 6.6x following the sale of Marriott Del Mar. Despite recent progress, we'll continue to reduce our leverage in a manner that protects or enhances shareholder value as we look to sell highly levered assets and issue equity to fund hotels when the value of our currency properly reflects the intrinsic value of our portfolio. Now let's turn to our updated earnings guidance. A full reconciliation of our current guidance can be found on Pages 16 and 17 of our supplemental, as well as in our earnings release. We expect third quarter 2012 RevPAR growth of 3% to 5% with adjusted EBITDA of between $57 million and $60 million, and adjusted FFO per diluted share between $0.20 and $0.23. As Ken noted, our second quarter performance has led us to increase our full year 2012 guidance, adjusted for acquisitions and equity issuances. We have increased the midpoint of our adjusted EBITDA guidance by $2.5 million to a range of $239 million and $245 million, and increased the midpoint of our adjusted FFO guidance by $0.02 per diluted share to a range of $0.97 to $1.02. As Marc noted, we expect that RevPAR in the second half of 2012 will be negatively impacted by isolated factors including software business in Washington, D.C. and approximately $3 million to $5 million of hotel revenue displacement from our sizeable renovation activity. Furthermore, we are mindful of the relatively soft economic news of late and, therefore, we have taken a marginally more conservative view towards operating fundamentals in the second half of the year. That said, we remain optimistic regarding the outlook for revenue and profit growth in the remainder of 2012 as a result of positive group booking pace, strong group booking production and healthy pricing pressure in many cities stemming from high number of sold out room nights. With that, I'll turn the call back over to Ken to wrap up our prepared remarks.

Thank you very much, John. Just a few closing remarks before opening the call up to questions. As I noted earlier, in spite of the difficult macroeconomic backdrop, lodging industry fundamentals have continued to strengthen over the past year and remained highly constructive, while, as John noted, we are conservative in our estimate of the industry fundamentals for the remainder of the year. Supply trends and capital costs are at historic lows, while lodging demand continues to build with groups booking and business travelers hitting the road in record numbers. The lodging industry's leading indicators clearly point toward prolonged growth over the years ahead. Sunstone's recently renovated well located portfolio is positioned to capitalize on continued lodging industry growth. And while we will continue to deleverage in a measured and deliberate way such as by funding acquisitions using equity price to attract [ph]growth valuations and by using excess cash flow to repay debt rather than funding material cash dividends. We believe our balance sheet is now attractively geared for the current phase of the cycle, especially when considering our low-cost, well-staggered, single asset mortgage structure, and the fact that 14 of our hotels are completely unencumbered by indebtedness. Apart from our solid portfolio and well-capitalized balance sheet, our greatest competitive advantage lies with our team. Over the past year, our carefully selected leadership team has crystalized exceptionally well. While each of us has room to improve, the team's capabilities, chemistry, discipline and enthusiasm are, in my opinion, second to none. We have a lot of be proud of at Sunstone, but I am most proud of my association with such a talented group. As I said earlier, our goal going forward is to continue to unlock Sunstone's considerable potential by adhering to our strategy and building a positive track record one smart step at a time. Thank you for your time today, and we greatly appreciate your interest in Sunstone. And we look forward to meeting with many of you over the next couple of months. With that, let's open up the call to questions. John, please go ahead.

[Operator Instructions] Your first question today comes from David Loeb from Baird. David Loeb - Robert W. Baird & Co. Incorporated, Research Division: I thought maybe you could talk a little bit about acquisitions. I'm particularly interested in how the pipeline looks in pricing. But I'd also like to hear about your manager relationships and whether that's likely a source of acquisitions, particularly since you did some shuffling related to Chicago.

First of all, the manager relationships. If you look at the Hyatt Chicago Magnificent Mile acquisition, actually that was in parts sourced through one of our strong manager relationships with Davidson, who was one of our top operators. We hold that group in very high esteem. So we've made no secret about it that we want to spend time rewarding managing relationships that have produced well for our company. And I think we've done -- we've kind of kept our word on that one. Going forward, we'll certainly source acquisitions through a variety of different channels, least likely to be the broker channels. Everything that we've acquired over the past year has been done so as has been acquired through kind of creative relationship based on channels, which would include managers. So the first part of your question as far as the pricing and pipeline, we had a conversation about this earlier in the week, that pricing has continued to improve, the market has continued to, I think, rationalize in terms of where deals can get done. If you're smart about it and creative about it, you can find some exceptional deals and I would hold on to Hilton Garden Inn Chicago transaction as exactly that. Once again, we were able to leverage our manager relationship. We were able to provide a contract to the manager of the Hilton Garden Inn in exchange for acquiring that hotel at a very attractive price, a full term below the EBITDA multiple at which we issued equity to buy the hotel. And yet, the asset generates RevPAR well in excess of our portfolio average, EBITDA per kilo in excess of our portfolio average and has the ability to achieve significantly higher numbers once Marc Hoffman and his team are done implementing their complexing strategy with the management of that hotel and the Embassy Suites across the street. So yet another example where we have rewarded a manager relationship with a contract in exchange for a smart transaction. As far as cap rates and valuations go, obviously, the interest rate environment has continued to improve with the 10-year at record lows. You're seeing a much better functioning CMBS market, better functionality also in the company loan market and the term loan market for that matter. We're not a user of debt, but I think it is a good indicator of the health of the potential acquisitions market. So while, in general, at these levels we're probably not an aggressive acquirer, unless we can acquire hotels at meaningful discounts to where we are able to issue equity to acquire them, we do see deals presenting themselves on a daily basis, good pipeline. David Loeb - Robert W. Baird & Co. Incorporated, Research Division: Okay, and then on the flip side of that, I understand that dispositions are taking a while, I understand how that process works. But are there more behind that or are there other hotels that you would look at as potential disposition to targets? How many characteristics are like that?

Sure. As we've said before, our -- part of our portfolio management strategy is to continue to build an urban core upper upscale institutional grade portfolio, compiled of larger hotels, generally hotels that are generating RevPAR in excess of what we're currently generating portfolio-wide, which for the second quarter was about $143. So there are a number of hotels you can see in our supplemental that are legacy assets for the company that may not fit within that core strategy. And over time, we may look to place those in homes that are more suited to those asset types. At this point we're not in a position to comment on any asset sales, but I think the angle that you're headed is a good one, as certainly improving our portfolio quality can occur through acquisitions, through aggressive asset management, through smart deployment of capital into our existing hotels and by pruning certain hotels from the portfolio.

Your next question comes from Eli Hackel with Goldman Sachs.

Just 2 questions. Can you just go over some of the synergies you think you can have by clustering the hotels in Chicago, possibly maybe even a dollar amount there? Also can you just maybe talk what you think you got in terms of replacement cost? And then finally, I think there's some new limited service supply coming into Chicago market next year. Just wanted to know your thoughts about supplying that market. So that's one question. The second one is what's the longer-term strategy related to the preferred, especially given how low debt financing is right now.

Great. I'll touch on both of those, and I'll also offer the microphone to both Marc Hoffman for the Chicago fees and then John on the preferreds. As it relates to the Chicago acquisition, you're right. First of all, on the synergies front, we did not disclose specifics on the synergies. We feel it's prudent to kind of hold back on that number until we're able to deliver on it. As you can imagine, we penciled out or more than penciled out a number of direct savings opportunities. And more importantly or equally importantly, we've also identified specific and significant revenue management opportunities. You can look at the -- look at our supplemental this quarter, and you can see how well the Hilton Garden Inn performed in terms of RevPAR versus the Embassy Suites across the street. And yet the Embassy Suites is the hotel we renovated last year. And so its -- we would expect that asset to be performing at or above the RevPAR trend on a year-over-year basis than the Hilton Garden Inn. I think part of what you're seeing there, in terms of the disconnect, is competition between those 2 hotels, whereas going forward, you're going to see cooperation and a joint revenue management strategy. So significant opportunities we believe on the upside in both hotels. And then on the operations front, as you can imagine, you've got 2 relatively small hotels that when we combine the 2, we can save quite a bit on running them as a 700-plus room single asset. They're just across the street from one another. I'm not going to provide any specifics in terms of the dollar amounts, but you can imagine that it's considerable, especially relative to the EBITDA that's currently generated by both of those assets. As it relates to the supply in the market? Absolutely. There's a 3-plex coming on several blocks up from our hotel that's being developed by White Lodging. That will be delivered in the next year or so. It’s further up in the market. It was highly factored into our analysis when we acquired the Hilton Garden Inn. The way we see it is we're Magnificent Mile on State St. That's further up in the market, and it’s a very deep Chicago market. We don't expect that, that asset will have significant impact on our hotels, any of the 3 hotels that we own in the city. However, we are cognizant of it, and we're aware that likely will at least create some turbulence in the supply market for a little while as that hotel is assimilated. As far as your question on the preferred. Clearly, 8% paper, which is trading right at about par at this point with no prepayment penalty is representing a pretty high fixed cost for the company. As we've stated, time and time again, deleveraging is one of our core goals. When you can get rid of expensive paper like that even though it does not have a maturity and do it without the penalty, that's obviously high in our list of potential debt paydowns. That's it. We have nothing to announce today in terms of repaying preferred. And also our strategy really is not and, I don't believe it, will entail issuing equity directly to shift capital on our capitalist stock. We'd rather deleverage through smart acquisitions like the Hilton Garden Inn, like the Hyatt in Chicago rather than just issuing equity straight up to repay debt. So -- and again we characterize the preferred as indebtedness. Marc, did you have anything else on Chicago or we're good there? And, John, anything else on the preferreds?

John here. As you probably -- the reason you're probably bringing these questions up is, obviously, the preferred market has been incredibly strong. We've seen a number of very well-priced issuances with literally over the past week or 2. There could be an opportunity there, something that we continue to evaluate, if potentially able to swap those out with much lower cost paper. That's all that I would add.

Your next question comes from Ian Weissman with ISI Group.

Quick question for you, and I don't know if you'll comment specifically on the progress of the noncore asset sales that we were talking about earlier in the year. But what would you say has been, sort of, the biggest impediment to getting those deals done?

Biggest impediment to noncore asset sales. We're not going to sell hotels at fire sale prices. You've seen a transaction market over the course of this year that's continue to improve. As you remember 1.5 years ago, 2 years ago, most of the deals are being done by other REITs. Now we're starting to see the market broaden out a little bit and the types of acquirers that would be quality candidates to acquire our noncore hotels have materialized over the course of this year. But our position is, well, yes, pruning the portfolio and harvesting gains on assets that we've executed our full business plan and -- that are no longer representative of the core hotels that we'd like to own. It's clearly part of our strategy. We're going to do it in a measured and deliberate and smart way. And as to the result, it takes longer to negotiate deal terms. And then because these assets are encumbered by assumable mortgage debt, that's actually one of the attractive features for most acquirers, it also makes the assumption -- the sale process that much more difficult and time-consuming because you've got to deal with servicers then special servicers, and then finally, rating agencies. And as I mentioned on the call, the Marriott Del Mar sale is currently at the rating agency level, so we've cleared every single approval hurdle at this point, then we've got one more rating agency to approve the deal. And each step of the way can take between 1 to 6 weeks, and it takes time.

Everyone talks about deals and gateway cities, but I'll just make a general question and maybe it fits within your noncore assets. But do you think you'll see an acceleration of noncore sales over the next 6 months? Not noncore, but called Tier 2, Tier 3 assets?

Possibly because, again, you've seen that the mortgage market continue to evolve to a point where acquirers who may be less well capitalized or smaller entities than a public company can access the secured mortgage market at a pretty high LTB level at fairly attractive terms. This is, again, about CMBS-like company and even term debt, now it's available so yes. That, as I alluded to in my comments, was probably going to be a solid driver for this second tier asset sales because, again, the acquirers themselves have slightly different characteristics than the companies like ours that are selling them.

Okay. And finally, corporate expense came a little bit heavier than we were expecting. Is there something going on in this quarter? And then what's a good run rate going forward?

So, sure, for corporate expense we did have some deal costs during the course of the quarter. We spent a fair amount of time and resources exploring a couple of different opportunities that are still kind of in the hopper, if you will, so we ran a fair amount of acquisitions and pending acquisition costs through the P&L. We also had some costs with respect to the sale of Del Mar. Beyond that, it was really kind of normal business on the G&A side. Run rate forecast G&A is still as we indicated, I think in the release between $19 million and then $20 million.

Your next question comes from Smedes Rose with KBW. Smedes Rose - Keefe, Bruyette, & Woods, Inc., Research Division: I wanted to ask you just if you could maybe just talk about some of your gateway markets kind of meetings calendar for next year. And specifically in D.C., it sounds like you are -- transit, the Renaissance who are shaping up well, but if you look at the convention calendar for the D.C. Convention Center, it's really very weak for next year. And I'm just wondering kind of what's happening at your property, and do you think the city-wide convention calendar will improve next year? And then maybe just sort of touch on Boston and Chicago and some of your other markets, what you're seeing for next year?

Sure, Smedes, let me start that off, and then I'll give it over to Mark. Actually D.C. and Baltimore are both up next year in terms of the number of citywide's. And D.C, you've got the combination of the inauguration and all sorts of other activity that happens on the year following the election. I got to say we couldn't be more bullish on D.C in 2013, and Baltimore tends to curtail off of what's going on in D.C. You're right. Some of the other strong markets this year are city-wides including New York and Boston, for example. and San Diego, as well, are going to see slightly lower run rate on city-wides next year. But I think that's one of the benefits of having fairly major group boxes in all of these markets that you see a rotation into one market and out of another. And -- let me give you over to Marc because you touched some other much more specific information on these assets.

D.C. 2012 citywide's were down significantly as I'm sure you know from the 20 in 2011 to 11 in '12, and total room nights were down -- convention room nights in '12 were down almost 29%. 2013 city-wides are up 3 to 14. But more importantly they're up 3. Its where they fall and the types of the city-wides, of the 14 conventions, 13 of them compress out at more than 15,000 to 20,000 rooms for the city, which is very, very strong. Baltimore city-wides in 2012 were down from 21 in '11 to 17 in '12. And peak city-wide days were down 30-plus percent. However, in 2013, city-wides are back up to 21 with definite pace up almost 30% for city-wides. Boston was a very strong year in 2012 with 26 city-wides. And the breadth of those citywide's also north of 7,500 was very strong, up from 21 in '11. 2013, the city-wides are back to a more normal run rate of 21. New York city-wides are up in '12, from 23 to 27. And in '13, they're sort of back to the normal run rate of 22 to 23. San Diego. A very strong year this year, 57 city-wide. We consider city-wide there of anything above 1,500 potential demand. In 2013, that number's down slightly to north of 50. In 2015, the current -- 2014, the current pacing for city-wides is around 50 as well. For our particular hotels, we've got very good pace. Our D.C Renaissance pace is up 47% in '13. It's down slightly in '14 and then back up 48% in '15. Orlando's up 9.5% in '13, up a few percent in '14, and up 3-plus percent in '15. Baltimore is up 39% in '13, '13 and '14, and down about 10 in '15. And then San Diego is up single digits in '13, '14 and '15.

Your next question comes from Kevin Milota with JPMorgan. I'm all actually all set. The product question answered the question.

Your next question comes from Enrique Torres of Green Street Advisors.

I was wondering if you could comment on how you think asset values and return expectations have changed, if it all, in the past 90 days or so given what debt has done.

How have asset values changed in the 90 day s or so? I've got to tell you, we don't think that there's been a fundamental change in underlying asset values over the last 90 days. Definitely do believe, as I indicated in my comments, that with industry-leading indicators continuing to strengthen and show positivity going forward and then with core interest rates continuing to decline and we kind of look at BAA instead of the U.S. Treasuries as a better indicator, but you'd still see some positive trends on that interest rate. All of those point to continued strength in asset pricing. So while we have limited data points and I don't believe there's no valid statistical sampling over the last 90 days of what's happening with asset trends, all of the empirical data would point toward continued strengthening in asset prices.

Enrique, just very quickly I would add to that. As Ken said earlier, I just want to add emphasis to it, that the credit markets are getting a little bit better and you're seeing a little bit more activity, more transaction volume that's likely to hit the second half. And just based on overall pricing chatter and expectations, also the number of people that are expected to come to the transaction market, I don't think there's been any reduction in asset values over the past 90 days with all the negative economic news. I think, if anything, it continues to trickle up.

The improvement in, kind of, the debt market, does that also help with kind of the red tape that you have get through in terms of asset sales and transferring ownership and going to the credit approvals for the new owners? And does it help that process at all, or is it really an improvement that market is -- it doesn't -- it's kind of independent of that? Or do they -- or does it make the standards kind of easier to get through the hurdles?

I think the process for debt assumption has certainly improved over the last several years. I mean back in the '08, '09 timeframe, it just wasn't going to happen. And so with that as a reference point, certainly the process has improved. And I agree, once there's a more competitive market, once acquirers do have viable alternatives, to, assuming that, again, if they can repay and replace the debt instead of simply assume it, they have a little bit more strength in the negotiation. So yes, you've seen some more rationality pervade the conversation as it relates to loan assumptions. I don't know how measurable that is, but once again certainly the indicators are that, that's becoming more high-functioning market.

Your next question comes from Ryan Meliker with MLV & Co. Ryan Meliker - McNicoll, Lewis & Vlak LLC, Research Division: Just a couple of quick questions for you. First on group pace that you gave for 2013 of, I think, up to 13.5%, is that revenue or is that rooms? And if it's revenue, can you break it up between the rooms and revenue -- and rate? And if its rooms, can you give us the rate along with it?

It's Ken. As it relates to fees for 2013, yes, we're up 13-plus percent for the whole portfolio. That's pretty much all rooms. So rate is slightly up, but it’s almost all occupied rooms on our baseline. Ryan Meliker - McNicoll, Lewis & Vlak LLC, Research Division: So with that being said, maybe this is a good question for Marc, are you guys, I guess, grouping up for 2013? Are you expecting your overall group demand as a portion of your total demand base to be higher in 2013? And are you sacrificing rate to do that in the extent that -- to the extent that there's macro uncertainty, and you'd rather be safe than sorry?

Yes, I mean, we saw a group rate increase in Q2 by 3.6% for the 32 pro forma comparable hotels. And as we talked about we're pacing for group rate, basically, flat down slightly Q3, Q4. A lot of the brand, the big box houses are talking about strength of group. The majority of that is really occupancy. Most of our group pace for '13 that's booked is booked because of contracts signed really as much in '10 and '11. And somewhat this year, we are clearly pushing the rate now for group, but I think we want to make sure that we have good base rates that we can continue to drive transient rate, which is a huge key. And as you've seen this year, we've got great transient rate growth, and we're continuing where we have compression to push group rate very hard.

I think that's a good way to describe that market. The group pays for group rooms and limited increase in ADR is part of a mixed management strategy that's enabling our hotels to eliminate these discount channels. And as the market continues to strengthen, as we continue to approach peak occupancy, grouping up and filling our hotels even though there's a limited year-over-year increase in rates, but filling it with high-rated group business that has terrific ancillary spend in the hotel. And we're trying to use those, that additional base of business to eliminate the discounted channel, the hotel they've been accessing over the last couple of years. Ryan Meliker - McNicoll, Lewis & Vlak LLC, Research Division: And then just one other quick question and a follow-up to David's question earlier on. You guys obviously had an incredibly successful arrangement with David. [ph]You were able to put together a couple of different assets for acquisition. Are you focused, going forward, on working with other third party operators as opposed to brands for some of the things that they can bring to the table while you can still maintain some brand relationships?

Yes, absolutely. I appreciate you asking that question. We love the idea of having a competitive stable of top-tier operators running our portfolio. And as I mentioned in my prepared remarks, we also -- while we love to celebrate successes and we want to do a lot of that, we also like the ability to hold our operators accountable for achieving the operating objectives that we all set forth. And so having third-party operators that agree with that approach and are exposed if they don't perform and are rewarded if they do, works very well for us. I should mention that Crestline is the operator of the Hilton Garden Inn in Chicago that we acquired. When we acquired that hotel from them, we kept them in as operator, and that's another very strong relationship for us. Interstate runs a number of our hotels, as does Highgate. It's such that we've got a lot of good third-party operator relationships. We'd like to continue to build that. We find that we do have a fair amount of control and interaction with independent operators that in many instances exceeds the level of control that we would have under brand-managed hotels. And that's not to say that with the brand-managed hotels, we don't have a very good aligned relationship. We made 2 General Manager changes over the last quarter in hotels that have hit our radar screen, that's hotels that were underperforming. They should have done better than what they did. And working with the manager, we made changes to the General Managers. And those were brand-managed hotels in both cases. We don't like to follow that course, but our managers know across the board whether its brand managed or independent managed that we're going to hold them accountable for strong performance.

Your next question comes from Josh Attie with Citi.

The high end of your guidance seems to imply for the fourth quarter RevPAR up 10%, is that correct? Am I doing the numbers right? And if it is, can you talk about what drives that level of growth at the high end?

Sorry, actually that's a little bit misleading. What you're seeing with our numbers is -- we obviously didn't give fourth quarter numbers. You're right. If you would just map this thing out across the board, you'd end up with a potential for a very significant growth in the fourth quarter. We're not going to stay that, that's not likely or not possible, but we're certainly not modeling that level of growth in the fourth quarter. You're seeing potentially a little bit of conservatism in our third quarter numbers. But across the board for our fourth quarter numbers, we are not showing -- in our current forecast, we're not showing a 10% growth in RevPAR.

So to hit the high end of your EBITDA and FFO guidance, that would be something less than 10% RevPAR growth in the fourth quarter?

Significantly less than 10% growth in the fourth quarter.

Okay, it's just a function of the way the numbers are averaging?

Yes, yes.

Okay, and if I could just follow-up on Ian's question on the G&A. Did you mention that the acquisition costs incurred in the quarter were for pending deals?

No, it's -- pending deals, no. The pending sale of the Marriott Del Mar, yes. So approximately $1.3 million of acquisitions-related costs for a couple of deals that we went heavy on and ended up concluding they were not the right transactions for the company. So those were expensed in the quarter.

Okay, but not for acquisitions that haven't occurred yet?

Correct, Josh.

Your next question is a follow-up from Smedes Rose with KBW. Smedes Rose - Keefe, Bruyette, & Woods, Inc., Research Division: I just wanted to go back to your commentary on the pace of group bookings for 2013 with rate being flat but demand improving. So what sort of percentage of your group bookings for next year do you think are on the books now? And is it fair to kind of think about that if maybe you're 50% done that the balance of that you would be more aggressive in pricing, so net-net you would expect to see overall group revenues improve next year with higher rate?

You're actually absolutely correct. I mean look, the largest percentage of group rooms that are on the books right now are at our 4 big hotels because majority of our remaining hotels are booked within a 12-month booking cycle, and we continue to see good rate growth looking at those hotels. And as I said, with us being up 13-plus percent and the majority of it being in rooms, we're obviously up in rooms compared to prior year. And we do expect in our bigger hotels everything being booked inside between now and the end of '13 to have a very solid ADR growth.

We have no further questions at this time. Please continue.

Thank you, John. Appreciate it. And thank you all for joining us on the call today. We look forward to meeting with many of you in the near future. And we appreciate your continued interest in Sunstone.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. Please disconnect your lines.