Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Sunstone Hotel Investors' Second Quarter Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. I would like to remind everyone that today's conference is being recorded, Tuesday, August 9, 2016, at 9:00 AM Pacific Daylight Time. I will now turn the presentation over to Mr. Bryan Giglia, Chief Financial Officer. Please go ahead, sir.

Thank you, Rachel, and good morning, everyone. By now, you should have all received a copy of our second quarter earnings release and supplemental which were released yesterday. If you do not yet have a copy, you can access them on our website. Before we begin, 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 adjusted 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 John Arabia, President and Chief Executive Officer; and Marc Hoffman, Chief Operating Officer. After our remarks, we will be available to answer your questions. With that, I'd like to turn the call over to John. Please go ahead.

Good morning, everyone, and thank you for joining us. Today, I will provide an overview of our recent operating results, discuss our views on the operating environment and then update you on our recent initiatives. Later, Marc will provide more details on our portfolio results. And Bryan will provide updated earnings guidance and an overview of recent financing initiatives. The second quarter operating results, which included comparable hotel RevPAR growth of 1.3% and total portfolio RevPAR growth of 30 basis points, came in below and at the low end of our previous expectations respectively. Nevertheless, our second quarter adjusted EBITDA and adjusted FFO per share exceeded the top end of our guidance as a result of lower than anticipated renovation displacement in Wailea, property level cost containment across our portfolio, the benefit of a reduction in current year property taxes at our Chicago and Houston hotels, and lower corporate overhead. So, let's dig in to some of the details of our recent operating trends. As you have heard from many of our lodging peers over this long earnings season, corporate transient demand was weaker than expected. While overall transient demand remained healthy in Los Angeles, San Francisco, Orlando and Washington DC. Corporate transient demand was softer than anticipated in New Orleans, New York, Chicago, Boston and Houston. In an attempt to maintain occupancy levels, operators’ backfilled the shortfall in corporate accounts by opening discount channels more frequently. As a result of this subtle change in business mix, our second quarter comparable room rates increased only 50 basis points over the prior year, which was more than 200 basis points short of our expectations. The inability to garner more meaningful room rate growth is a bit of a conundrum considering that occupancy levels for the industry and our portfolio are at…

Thank you, John, and good morning, everyone. Thank you for joining us today. I'll review our portfolio's second quarter operating performance in greater detail. For the second quarter, our portfolio generated comparables hotel RevPAR growth of 1.3% which was below our expectations. Our RevPAR growth was driven by a 0.5% increase in ADR and a 70 basis points increase in occupancy. Despite achieving a second quarter record total occupancy of 87.1%, room rate growth was muted as our operators were increasingly relying on lower-rated channels and segments to offset declining levels of premium demand and rates. While we were more encouraged by our group performance in the second quarter, softness within the transient segment continued and the compression needed to regain pricing power remained elusive. During the quarter, we saw heightened transient rate sensitivity as premium demand remained sluggish and business travelers complied with more restrictive corporate travel policies. As a result, our transient revenue declined by 3.1%, driven by a 1.4% decrease in the room nights and a 1.7% decline in rate. As previously mentioned, we had solid group performance in the second quarter with total revenue up approximately 5.3%, driven by a combination of a 1.5% increase in ADR and a 3.7% increase in room nights. In particular, our corporate group segment came in very strong with a robust 16% increase in total revenue over the same period of the prior year. This growth was driven by a 7.4% increase in room nights and a healthy 8.2% increase in rate. Hotels that saw a significant in corporate group performance in the second quarter included the Renaissance Baltimore, the Renaissance Orlando, the Boston Marriott Long Wharf, Renaissance Long Beach, our Hyatt San Francisco, and the newly renovated Boston Park Plaza. Overall, our group segment actualized 395,000 group room nights in the second quarter, which is a record for this period. For the year, our group pace is up 7.4% for the total portfolio with the bulk of the increase concentrated in the third quarter. As of the end of the second quarter, we had 93% of our forecasted full year group room nights on the books, which is an increase of 150 basis points relative to the same time in 2015. With that, let me turn the call over to Bryan for more details on our earnings, our balance sheet and guidance. Bryan, please go ahead.

Thank you, Marc. At the end of the first quarter, we had $355 million of unrestricted cash on hand and $1.2 billion of consolidated debt and preferred securities. During the quarter, we issued $75 million of new Series F perpetual preferred stock to repay the $73 million mortgage loan secured by the Renaissance Orlando. The 6.45% coupon achieved on the new Series F is 50 basis points inside our Series E, which was issued in the first quarter and represents another successful step in executing upon our long-term financing strategy. Our debt has a weighted average term to maturity of approximately 4.3 years and an average interest rate of 4.3%. Our variable rate debt as a percentage of total debt stands at 22%. We have 21 unencumbered hotels that collectively generated approximately $215 million of EBITDA over the trailing 12-month period and an undrawn $400 million credit facility. Our balance sheet continues to be strong and we retain considerable flexibility to take advantage of opportunities as they present themselves. As John mentioned, we are currently evaluating attractive refinanced options for our two upcoming 2017 maturities and expect to have more information on our next call. Following the potential refinance of both hotels, we expect our weighted average term to maturity to extend to approximately six years, and we will have no remaining maturities until 2019. Now, turning to third quarter and full year 2016 guidance, a full reconciliation can be found on page 38 of our supplemental, as well as in our earnings release. As discussed on prior calls, our 2016 earnings are being negatively impacted by the repositioning of the Wailea Beach Resort, which we expect to be completed at the end of this year. As such, our guidance presents expected RevPAR for both our total 28 hotel portfolio…

Thank you. [Operator Instructions] We'll take our first question from Shaun Kelley with Bank of America.

Hi. Good morning, guys. So, maybe, actually, I'll start with the last point on the dividend bond in the fourth quarter, Brian. I'm curious a little bit on – I think this has generally been Sunstone's historical pattern is to pay a bigger dividend or a catch-up dividend in the 4Q. But as investors start to focus a little bit more on yield characteristics, is there any ability to potentially smooth that out over time? Or how do you just kind of think about the dividend policy, broadly speaking? That would be helpful.

Good morning, Shaun. When it comes to the dividend, you're correct. We have historically paid a catch-up dividend in the fourth quarter. When we evaluate the quarterly payments and our policy, when it comes to dividend, we look at our leverage future CapEx and investment needs and use that to balance our needs to what we would payout. This year, we will continue to stay with the existing policy as we look into next year, it's something that is evaluated on a quarterly basis by the board of directors. That said, when we look at the cash dividend component, the yield is still on par with what the majority of our peers are paying and whether that is paid on a quarterly basis or more towards the end of the year, that yield is still realized. But it's something that every quarter we discussed with the board of directors. And we'll evaluate that going forward.

Okay. And then just my second to kind of turn over to guidance and outlook. First of all, I appreciate all of the additional commentary about group and the slippage calculation because I think that was new, and it's pretty helpful. So, then but to expand on it and to sort of go there, I mean, you give this pretty tight range. You say you didn't see any noticeable change in the second quarter, but then you're kind of, obviously, bumping up your target for potential slippage in Q3. Is there something you've seen so far? Is this pure conservative, and I think you'll lose a little bit, too, it's probably conservative? But just help us understand your thought process and what you might be seeing in patterns that would make you want to do that?

Yeah. Sure, Shaun. It's John, and good morning. As we saw with the increase in discounting and the falloff in corporate transient ADR, we thought that it would be worthwhile to have an incremental amount of conservatism when it came to our group bookings. The second quarter, we saw very traditional or historic slippage rates in that 84%, 85%. What we have done, though, is our asset managers have encouraged our large box hotels to slip the groups more than normal, which allows them to free up incremental room inventory to sell. That is a strategy that if we are too conservative it's more likely than not we will result in incremental walks, more sellouts, what have you. But if the incremental doses of conservatism was warranted, it gives the operators incremental time to sell that inventory that might not show up. We will see. This was a proactive step on our asset management group, and working with our operators to go group by group and to slip those groups more conservatively. We will see.

It's helpful, John. And my last follow-up would just be, did any of those initiatives or this target, did that come from some of your individual operators? Did it come from the brand from some of the bigger brand-managed box because they tend to – I think the bigger group boxes tend to be brand-managed. So, where did the initiatives start? I'm just curious of the direction you're getting.

Shaun, in terms of the discussion on slippage to individual group, those are conversations that started out of our Chief Operating Officers' office and then worked with all of our asset managers going group-by-group. And this is something that is done by the hotel operators on a very regular, consistent normal course of business. What we decided to do was to push harder over the past couple of months considering some of the things that we've seen in the broader economy and some of the trends that we saw in transient business, we thought that it was warranted to add that extra layer of conservatism. But that's a discussion between our individual asset managers and our very, very capable, very good property managers.

Understood. Thanks for the additional disclosures.

You bet.

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

Thank you. Hey, guys. The Renaissance in Orlando obviously had a great quarter. I'm just curious are you hearing any concerns from your customers about the Zika or anything like that?

Good morning, Lucas. We have not thus far. That has not bubbled up. It's obviously relatively a new trend, and thus far, it has been a concerned more in Miami, but thus far, we have not seen any concerns, cancellations or change in trends. Orlando has been an enormous bright spot. Our hotel there has very – has had a very good year and we expect good numbers from it for the rest of this year. Just really hitting on all cylinders.

Great. And then, the conservative [indiscernible] guidance, can you quantify that in terms of RevPAR growth, the hit maybe to the top-line growth?

You know, I don't have it directly in front of me, Lucas. Well, think about this way, if our total group revenues make up about 33% of our total revenues or rooms revenue but more than that in terms of total revenue. And then if you figure, we slipped from about 85% than 200 basis points. It's not enormous but – if you have a more specific number, Bryan?

I don't.

I think that helps put it into context.

Great. And then, lastly, the Wailea Hotel had another quarter where it did better than expected. I'm just curious, is that more market-related or is that just better execution at the hotel?

Yeah. Luke, it's Marc. No. It's really related to group base that we were very aggressive putting on knowing that we were going to have this renovation. So, we took a very aggressive approach. The hotel this year is actually going to do almost 32,000 group rooms. Rate will be down, as you would expect. And that was a very good decision because we're able to cut deals with group and have them come during the renovation that's made a major impact and that allowed us to compress the building more than we expected.

Awesome.

In addition to that, Luke, is we've also found that the rates – the transient rates that we've offered there, the discounts have not been as significant as we feared. Going into a renovation where you are literally putting bulldozers into pool areas and wiping out the entire Luau grounds, it's really as much part of science about where do you set those rates. And as we saw consumers attracted by a discount rate into the premium destination of Wailea, we were able to slowly but surely move those rates up even with people knowing full well the condition – the current condition of the hotel which is pretty disruptive. So, we've been pleasantly surprised, albeit, I mean, take a look at our RevPAR decline for the hotel, pretty significant but not as bad as feared.

Very helpful. Thank you.

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

Good morning out there, guys. John – I'm just curious, John, how do you think about the metrics you would need to see to pull the trigger at some point on investing capital either into your stock or in the new assets? Is that sort of more time-driven that you just don't think that's this year and it's next year, or is it certain valuation metrics? I'm just curious how you're thinking about that because a lot of companies such as yourself have lowered levered build-up capacity. I'm just wondering when do you sort of strike.

It really depends on the opportunities in front of us. We have been a net seller of hotels since the first quarter of 2015. Over the past eight or nine months, off the top of my head, we've sold approximately $600 million worth of assets. Relative to our size, Jeff, I would say that that's material. In our prepared remarks, we talked quite a bit just about our overall investment capacity, so I think we're in very good shape there. I think it really comes down to the investments presented to us. Is there a scenario in which we would acquire assets in the current market? If we thought about long term we could make money for our shareholders, I think the answer is, we would very much consider it albeit still being a net disposer of assets in this market. And it's not just one investment. I think that given our balance sheet and given our scale, we're looking at multiple potential investment avenues over the next several years. So, I'm not trying to dodge your question, Jeff, but I think it really depends.

And I guess how do you place just repurchasing shares in that framework? Do you see that as more of a priority over asset purchases or is it – you don't necessarily line them that way?

It's a very interesting conversation, particularly in light of how much hotel reach share prices have rebounded. I think it was a much – share repurchase was a much larger conversation. The share price is 20%, 30% ago, we're trading at very material discounts to NAV with somewhat of an anticipation that asset values in a late-cycle market could deteriorate. We have not seen that really, thus far, and the share prices have rebounded. So, again, it just depends. What I like about how we are currently positioned, Jeff, is I don't know exactly how things will play out. I don't know if asset values become considerably cheaper, if our share price becomes considerably cheaper, if there are other companies out there that become very attractive. What I do like about where we sit is we have the optionality to address or to look at all of those investment avenues, while taking any potential defensive cost of almost any economic downturn off the table. So, we'll take it day by day, quarter by quarter, but I really like where we sit.

Just to switch gears, you mentioned in your remarks more frequent use of discount channels resulting in a mixed shift that impacted your realized rate. At the risk of being maybe too nuanced, but can you talk about the rate trends within various channels? I guess, I'm just wondering from the customer's perspective. Do they perceive that pricing is strengthening or softening? I recognize the impact on you guys. I'm just curious as to how your customers see it.

Hey, Jeff. It's Marc. Good morning. I think from a standpoint of the customer, I think what they're seeing is they're seeing availability, right? Because hotels are not sold out type on Tuesday, Wednesday, Thursday. And so, they're seeing availability where there are other channels open. So, in terms of your question just sort of in some areas, our premium rate for the quarter was down slightly a few dollars. Our rooms were roughly down $2,000 or $3,000. The biggest change is really in the whole waterfall of discounts where we grew – government military room nights grew materially, advanced purchase grew slightly, other discounts grew. And then the biggest challenge is that the other discount rate itself fell slightly. And so, I think the customers are seeing that availability. And then, the other piece is just the technology that we think, as John spoke about, where people can look at our rate and then drop a rate into a rebooking app, and then, let it sit there for a week and two and pull out another rate.

Understood. And I guess, while I got you, Marc, can you tell us how many points of occupancy you have on the books for 2017 maybe compared to where you were the same time in 2016? I'm just curious how much you might have sort of grouped up compared to prior period. It might not be material, but it's [indiscernible].

Yeah. We can certainly talk about group pace. I wouldn't be able to tell you grouped up points of occupancy. But from a group pace standpoint, our current pace for full year 2017 is were up about mid-single digits, Jeff, for our group pace next year. We're not going to give out the specific numbers on our guidance for 2017 just yet. We feel pretty comfortable with where our group paces. And when you take a look at – you really have to take a look at our big box hotels when you take a look at what amount of business is already on the books, and we are about 50% for big box hotels already on the books as of the end of the second quarter. Keep in mind a question you didn't ask, but that, we'll continue to increase similar cross-over goals for our hotels range anywhere from 70% for our large group hotels up to low 90% for the Hilton Bayfront.

And just one last question, I'll let you guys move on. Just concerning San Diego, can you guys talk a little bit about the longer-term supply outlook there maybe for hotel taxes, as well, because there's a lot of noise in the market about the reuse of the former rental car lots at the airport on Harbor Drive to the redevelopment of Seaport Village to the [indiscernible] looking for a stadium and convention center. And I think you're in a contiguous convention center proposal where your hotel is. It just feels like there's a lot of rooms being contemplated, maybe not all of those will happen, just curious. But your sense is maybe somebody is more local?

There are a few large hotels being contemplated near or a couple of miles away from the convention center. There are several legal challenges that are currently in the market on some of those projects. It would be reasonable to assume that eventually some of those hotel rooms will be delivered. That said, given the current landscape, I think it's going to be some time before we see some of those larger hotels being delivered. There are a couple of smaller hotels, for example, a [indiscernible] is coming up, a sister brand to the Montage is coming up in downtown. But as it relates to competing with our large hotel, I think it's going to take a little bit of time. We also really like where we are located, just on the doorstep of the convention center. So, I think we're in pretty good shape, Jeff.

Thanks, guys.

Sure.

Our next question comes from Bill Crow with Raymond James.

Hey. Good morning, folks.

Hey, Bill.

John, when you guys announced the Boston and Hawaii redevelopments, the reaction by The Street was not terribly favorable, I guess to say it nicely. And I think that was largely because of concerns about where the cycle would be when the property stabilized. And I'm just wondering, was The Street right given where we are and the concerns we're having? Have you unchanged your underwriting at all, your assumptions for the next three to five years for those assets? Thanks.

Hey, Bill. Anytime we invest in hotels, we put into our underwriting a downturn in the cycle. We will be off in terms of timing, magnitude, duration of those downturns, but in each one of those, we have predicted a downturn eventually in operating fundamentals. I think we – just back from memory, I think we had assumed a 2018 downturn, which right now doesn't feel like we're too far off. So, we believe that when we made those investments, we would invest capital at a spread to our cost of capital. And we still feel comfortable with those assumptions. Keep in mind that when we made those investments, we believed, as we continue to believe, that we were changing the earnings profile of those assets materially. We did not make those investments for the short term, we made them for the long term with a long-term view. And those hotels are performing in line or in excess of our expectations. So, I and I think the team would make those investments again.

Perfect. That's all I wanted to hear. Thank you, sir.

Thank you, sir.

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

Hi. Good morning, everyone. Just wanted to draw down more on the group guidance for third quarter. So, your pace for 3Q right now is 15%. And last quarter, as of – in May, your pace for 2Q is 5.4%. I think you hit that exactly for 2Q. So, what are you assuming, I guess, for deceleration in terms of slippage and, I guess, rate in order to meet your group expectations for the third quarter?

Hey, Anthony. Keep in mind that as time goes on in those really high-pace quarters, the pace number is going to moderate over time simply because if it's made up – because if it's made up largely of occupancy, you will start running out of times or availability for group. So, all third quarter group pace from the end of the first quarter to the end of the second quarter did contract as expected. Marc, any incremental color?

Yeah. The only incremental color is that we have 96% of our group on the books for the third quarter, and we're sitting relative to the last several years in a better place than we were over the last three years.

Okay. So, in terms of just the – when we look at the slippage assumption for the third quarter, have you started to already sell some rooms that you may be modeling that wouldn't materialize into lower channels for the third quarter?

What that does is it allows the operators to change their forecast and go after more transient business, if they believe that those rooms are going to be open.

Yeah. And do the groups in the third quarter skew to any industries that are seeing difficulties like oil and gas, finance?

I'm sorry, Anthony. What was that?

Do the groups that are booked in the third quarter currently skew to any industries that are seeing earnings growth challenges such as finance or oil and gas or foreign [indiscernible]?

No. Outside of Houston, which I think has been very well-documented and forecasted within our forecast, I would say no.

Okay. Switching gears, I guess, to your investment capacity. When you do decide to invest further, what markets or [indiscernible] do you think you need more exposure to?

It really comes down to the investment, Anthony. As a capital allocator, I don't think there's any particular market that we absolutely need to be in. I think it really comes down to the risk-adjusted opportunities in front of us. There are certain markets that we'd like to be in or like to have a larger exposure to, as well as some that – some markets that we'd like to contract, but I think really again comes down to the opportunity.

All right. That's it for me. Thank you.

Thank you, sir.

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

Hey, good morning, guys.

Hi, Chris.

Hey, John, appreciate your commentary up front about the maybe some changes to industry translation policies. But is it your sense that the operators are kind of looking at this seriously, or is it more the ownership group is maybe carrying the baton a little bit and pushing them to do something different?

I think it's being contemplated. I believe that various operators see this as a challenge and something that long term they wish to fix. By the way, Chris, this is not an easy fix. I think that there is, first of all, just general inertia in that this has always been the way that the hotels have worked and taking reservations. I think there's some hesitation and rightfully so from operators, particularly smaller operators that if they implement such plans that they would lose index and might not be followed by others. I also know the technology is an issue on this front. And that many reservation platforms don't currently have the ability to charge for prepayments or charge for reservation fees and given the fragmented nature of the industry, it would require all the operators to charge such fees. Now, I just used the word fragmented. I hear often that this will never change because the industry is too fragmented. I don't buy that at all. I think that that is absolutely an excuse. And this industry is leaving money on the table where we should follow from the example put out by the airline industry which is not as fragmented, but still, I think they've done a wonderful job in changing their practices over time. This is going to take time. It's going to take investment. It will take time. But I think it's something that we should eventually do as an industry.

Great. That's really great color. I want to ask you real quick on the corporate side. You guys have seen several cycles. Does anything feel different this time in terms of this – maybe being a temporary slowdown and just some hesitation over macro events? Or do you think this is kind of a garden-variety, end of cycle, corporate hesitation on booking?

No cycle ever comes in the same way. I think one disappointment as we've been talking about earlier today has been the amount of discounting so early, considering that our portfolio is at 86%, 87% occupancy in the last quarter and which is one of the key topics we're talking about on this call is discounting. I think that's unfortunate. When you take a look at this economic recovery, I would say, it's – and please forgive me, I'm not an economist – but it appears to be far more muted than recent recoveries as the entire economy seems to have delevered. What I think that points to, though, in some kind of decline is we might see more muted decline this time around as corporations and the consumer tend to be less levered and I think, quite honestly, just to have more gas in the tank. We'll see. The good news is if that turns out to be the case, I think we're in really good shape. If a far worse scenario pans out and this downturn is as of the same magnitude as of the last downturn, we are in very good shape. And I think that the number of investment opportunities could be robust.

Okay. Very good. Thanks, John.

Thank you.

Our next question comes from Thomas Allen with Morgan Stanley.

Hi. Looking at your property level RevPAR growth numbers, it seems like the biggest declines were in Houston, New York and Chicago. I think we're all expecting there to be weakness in those markets, but can you talk about how that trended versus your expectations and how much of the full-year guidance got its way into those markets, recognizing they're relatively small [indiscernible]? Thanks.

Yeah. I think that in terms of the percentage to the total portfolio, I think we'd have to get back with you on that just to do the math, but I think, look, we know that Houston are soft. We know New York is going to continue to be soft. I think we saw among the rest of the portfolio slight softening in places typical to everyone else in the industry and to those cities.

So, I read that as those markets were just as soft towards the expectations as other markets were? And in terms of the full-year outlook, it wasn't driven by lowered expectations for those markets specifically?

I would say, Tom – so, it's John. I would say that the reduction was fairly broad-based. If you had to isolate a couple of specific hotels that brought down their guidance more than others, I would say one was Houston specific to a single piece of business, a large piece of business. Boston has been a bit softer than we anticipated particularly on the rate side. And New Orleans has been a little bit softer than the rest of the portfolio. That's really where it's – if you had to identify individual hotels, that's where it's coming out of. But the biggest point is that it has been more broad-based.

Okay. Helpful. And then, just as a follow-up, your last comment was you're highlighting your disappointment of discounting so early in the cycle. I think some of that discounting is coming from the hotel brands push to drive more distribution away from the OTAs to direct. Are you supportive of that? I mean, other people are talking about short-term pain for long-term gain. I mean, how are you thinking about it? Thanks.

100% supportive. Completely supportive. Again, I believe that we, as an industry, have done a poor job in allowing intermediaries to take too much of the profits from us. And we are completely supportive even if it comes at the cost of incremental short-term discounting, which we don't anticipate will be the case long-term. And we are hopeful we will make some up in margin over time. Completely supportive.

Great. Thank you.

Thank you.

Our last question comes from Ryan Meliker with Canaccord.

Hey, guys. I'm glad I got in there in the wire.

Hey, Ryan. How you're doing?

I just wanted to talk – Good. Thanks for taking my question before the end of the hour. I just wanted to talk a little bit more, I'm sure I'm going to beat a little bit of a dead horse, I want to make sure I understand things correctly. In terms of how you're thinking about forward guidance with the strong group pace. It looks to me like you, guys, are assuming that transient RevPAR growth is likely to be, I don't want to say extremely negative, but materially negative in 3Q with your group booking pace up so strong even when you factor in a reduction to that based on the 200 basis points. Is that a fair statement?

For the third and fourth quarter, obviously, since the beginning of the year, our transient occupancy and transient ADR expectations have come down pretty meaningfully, Ryan.

What if they turned negative?

For occupancy, yes. At one point, we thought it'd be, let's say, for the second half of the year, not to go into so much specifics. But we thought it'd be modestly up. And now, we think that that transient occupancy will be down a little bit. We've shaved from the beginning of the year with budgets. We've shaved our transient ADR growth assumption. We've shaved – just eyeballing it – 400 basis points, 500 basis points in the third and fourth quarter with transient ADR growth of, we're talking basis points to a couple of percent in the third and fourth quarter.

Okay. So, pretty material. And then, I guess...

[Indiscernible] I'm sorry. Go ahead.

Go ahead. No, please.

No, please. No, that was it. Sorry.

Okay. No. I guess – and that makes sense. And then I guess the second – the follow-up there is, 3Q is obviously a strong occupancy quarter just like 2Q was, but you're coming in with a much stronger group pace to 3Q than 2Q. So, you should have more base demand on your books. Are you finding, as you're going through the quarter, any better ability to push pricing for the transient traveler, especially the leisure transient traveler which is a little more heavily weighted in the third quarter?

We build in terms of total RevPAR growth as the months of the quarter go along. So, July is anticipated to be our weakest of the three months building partially because of the change in calendar, change in Jewish holidays, more compression on group. So, we shall see. We are hopeful that that compression materializes as normally would be the case into higher room rates and our ability again to push. What has left us with, I think, again, a dose of conservatism is, we thought that about other months and it has yet to really materialize as much as we thought. So, I think...

No. Potentially that.

Yeah. September will be a very interesting month.

No, that makes sense. And then just out of curiosity, I'm guessing that you probably can't quantify this. [Indiscernible] have much impact at all. But it seems like in markets like San Francisco and New York, Southern California, now you've got Anaheim, Airbnb is chasing some significant regulation, and some of that could start to be enacted in a pretty shorter order. Do you think that will help at all from a compression pricing standpoint? Do you think it's not material enough to really move the needle. How are you thinking about that?

On the margin, I do think it will be helpful particularly on very high compression nights where it appears that a lot of the Airbnb inventory comes out during those super compression periods to the extent that there's fewer of those Airbnb rooms available. I think that that will help the hotel industry on the margin. It's tough to quantify, though, right? Tough to quantify.

Okay. That's it for me. Thanks for taking the questions.

Thank you.

This concludes today's question-and-answer session. I would like to turn the conference back to Mr. John Arabia for closing remarks.

Well, thank you very much for your time and your interest in Sunstone, and everyone have a great day. Take care.