Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Sunstone Hotel Investors Third Quarter 2022 Earnings Call. At this time all participants are in a listen-only more. [Operator Instructions] I would like to remind everyone that this conference is being recorded today, November 8, 2022, at 12:00 p.m. Eastern Time. I will now turn the presentation over to Mr. Aaron Reyes, Chief Financial Officer. Please go ahead, sir.

Thank you, operator, and good morning, everyone. Before we begin, I would like to remind everyone that this call contains forward-looking statements that are subject to risks and uncertainties, including those described in our prospectuses, 10-Qs, 10-Ks and other filings with the SEC, which could cause actual results to differ materially from those projected. We caution you to consider these factors in evaluating our forward-looking statements. We also note that this call may contain non-GAAP financial information, including adjusted EBITDAre, adjusted FFO and property level adjusted EBITDAre. We are providing that information as a supplement to information prepared in accordance with generally accepted accounting principles. On today's call, references to our comparable portfolio will mean our 13 hotels portfolio, which includes the Confidante Miami Beach, but excludes Montage Healdsburg and Four Seasons Resort Napa Valley. Additional details on our second quarter performance have been provided in our earnings release and supplemental, which are available on our website. With us on the call today are Bryan Giglia, Chief Executive Officer; Robert Springer, President and Chief Investment Officer; and Chris Ostapovicz, Chief Operating Officer. Bryan will start us off with some commentary on our second quarter operations and recent trends. Afterward, Robert will discuss our recent capital investments. And last, I will provide a summary of our current liquidity position, recap our third quarter earnings results and provide some additional context as to how we are thinking about earning to the remainder of the year. After our remarks, the team will be available to answer your questions. With that, I would like to turn the call over to Bryan. Please go ahead.

Thank you Aaron. And good morning everyone. We are pleased with our portfolio's performance in the third quarter as robust leisure demand in the final months of the summer transition to encouraging signs of increased corporate and group travel as we head into the fall. The quarter represents the strongest relative performance that we have seen since the onset of the pandemic with comparable rooms RevPAR in September and total RevPAR for the quarter, both coming in above pandemic levels. Once again, our operators were able to aggressively push pricing which contributed to comparable average daily rate of $288 and 11% increase from last year and a 16% increase as compared to 2019. While we saw meaningful year-over-year rate growth across our portfolio, the greatest increase was at our urban and group-oriented hotels, which grew rates 20% in the quarter as compared to the prior year. San Francisco led the portfolio on rate growth and we are encouraged by the recent trends we are seeing there, especially with our recently completed rooms’ renovation. San Francisco also saw a meaningful increase in occupancy as corporate and group customers returned to the market. While the market has a way to go to return to 2019 levels, 69% RevPAR growth compared to 2021 is a positive step in the right direction and we expect that to continue into the fourth quarter. Our resort portfolio once again performed well and managed to further grow rate above what was a very impressive 2021 performance. Our two premier wine country assets continued to season and they generated a combined third quarter ADR of over $1,500, the highest combined quarterly rates we have seen since our acquisition. Including these two hotels our total portfolio generated a third quarter RevPAR of $223 made up of occupancy of 71%…

Thanks, Bryan. We are pleased to be making a number of strategic investments into our portfolio after closing on several acquisitions and dispositions in the first half of the year. I'll start off with a review of our plans for our recently acquired Oceanfront Resort in Miami, and then I'll provide an update on some of the other renovations and initiatives we have underway across the portfolio. Our repositioning of the Confidante Miami Beach is in the middle of the design and approval stage, and construction will soon be underway. The renovation is scheduled to begin next year following the market's high season and to conclude in the first half of 2024 when the hotel will debut as the Andaz Miami Beach. The investment will transform the asset and better take advantage of its great location and superior beachfront footprint. As we discuss with you on the prior call, we will renovate all aspects of the hotel including relocating the lobby retting, the food and beverage outlets, reimagining the pool and backyard recreation areas, modernizing the guest rooms, expanding the suite mix, and upgrading the meeting and event spaces. With these enhancements, we anticipate significant ADR growth and believe the property will be able to better compete with nearby luxury hotels. Because of the all-encompassing nature of the repositioning, we will incur significant displacement next year while the work is completed. However, post repositioning, we expect the hotel to generate a very attractive 8% to 9% yield on our total investment and we will own a fully renovated oceanfront luxury resort at an all-in basis of approximately 900,000 per key in a market where per key valuations for similar assets are well in excess of $1 million. This is the type of investment we know well and have had great…

Thanks, Robert. As at the end of the third quarter, we had approximately $168 million of total cash and cash equivalents including $50 million of restricted cash. We retain full capacity on our credit facility, which together with cash on hand equates to nearly $670 million of total liquidity. We’re in the process of exercising our extension option on the mortgage loan secured by the Hilton San Diego Bayfront, which will be completed in the current quarter. Once that is done, we will not have any debt maturities within the next year and our balance sheet will remain one of the strongest in the sector. Shifting to our financial results, the full details of which are provided in our earnings release and our supplemental, the quarterly results which surpassed our initial expectations reflect continued strength and leisure travel and growing corporate and group demand. Adjusted EBITDAre for the third quarter was $64 million, and adjusted FFO was $0.24 per diluted share. The third quarter results include approximately $1 million of revenue displacement related to the Westin conversion work in Washington DC and we estimate that approximately half of the $2 million in displace revenue from Hurricane Ian cancellations was in September with the balance impact in Q4. When we spoke with you last quarter, we provided some broad indications for how we thought full year occupancy rate and profitability could transpire as we moved into the third and fourth quarters. While those parameters shall generally fit within our current thinking are better than expected performance in the third quarter would now suggest we are likely to be in the upper half of the ranges we discussed. In 2019, our current 13 hotel comparable portfolio, which includes the Confidante Miami Beach, but excludes our two wine country resorts generated RevPAR of…

Thank you. [Operator Instructions] Your first question comes from Smedes Rose from Citi. Please go ahead.

Hi, good morning.

Good morning.

Bryan, I wanted to ask you just I guess a little bit more specifically about the two wine country properties. We have essentially a year’s worth of results now and I’m just wondering when do you think that they can start to get you more meaningful returns on the – I think the combined investment of around $440 million? And I guess specifically for the Four Seasons, does it – is it a matter of taking costs out? Do you think there’s upside? Is it got to be bit more occupancy? I’m just wondering like a $2,000 daily rate. It seems like maybe there’s not a lot of upside there, but maybe there is. I’m just kind of interested in how you think this plays out over the next year.

Yes, absolutely. Thank you, Smedes. When we look at both of the wine country resorts, they continue to ramp as they have all year and this year what we saw in the summertime is the market started to revert back to the normalized seasonality that you would see in Napa and Sonoma during the summer. If you look back to Q3 of last year, Montage and the market had a very, very strong summer, a very strong occupancy driven summer and that was primarily due to fewer luxury options available to that luxury traveller. This summer is a little bit different story. You had – the U.S. luxury traveller could go international this year. A lot of European, especially European wine destinations like France or Italy were available and they weren’t available prior years, which brought that seasonality back to the market. Additionally, the strong U.S. dollar probably exacerbated this a bit, making it more attractive going internationally and making it more challenging for international travellers to come to the U.S. Where we have the resorts now, they have – we’ve established the resorts of the leisure customer and both hotels continue to focus on growing their group base, which they have done this year and will continue to do into 2023 and beyond. Montage has been open a little bit longer, so it’s a little farther ahead than of the Four Seasons in this process. But when we look to next year, both hotels have been able to put significant amounts of group business significantly higher than what was on the books at the Montage for 2022. And so we see very good growth on the group side. And remember the group business at these hotels, while it’s a lower rate than the transient rate, it is not that much lower than the transient rate and it comes with a lot of ancillary spend upwards of $800 plus per group room night. And so it’s very profitable business. And so part of the ramp up and the maturation of these hotels is getting that right group base in there, getting that ancillary spend that then will significantly impact the profitability and then allow also to be able to compress transient rates and keep the transient rates as high as they are. And your point on the $2,000 a night, the rate is definitely higher than where we thought it would be at this time, but we expect that to hold as we go into next year, when we look at our…

Bryan, can I just interrupt you just for one second? I’m sorry. I just – because I know you probably have a lot of questions and I know we’re trying to be limited to one. But I mean, I guess my question really is, it’s a $440 million investment. What do you think these things do kind of at peak? I mean, do they ramp to the $45 million, $50 million range? Is that a reasonable expectation on the returns sort of cash on cash returns? And what do you think the timeframe to get there is if that’s a reasonable fit sort of all longer [indiscernible]?

Yes. I mean, when we acquired – we acquired these hotels, our expectation was that they would get to a 6% to 7% NOI yield on our investment. That timeframe, knowing that this type of hotel takes a little bit longer to ramp up was the kind of 2025, 2026 timeframe. It’s also when you look at this type of asset, it’s also to understand and remember that luxury resorts like this hold their value much better and much more consistently than standard upper upscale hotels. If you look at the transactions that have happened in this market, which are few and far between due to the fluctuations and especially in the debt markets, most of the transactions you’re seeing are luxury hotels. That’s because the luxury buyer tends to be better capitalized, less dependent on debt can see through near-term turbulence and are willing to pay a full price for very scarce assets. And so when we look at our long-term cash on cash return to these hotels that hasn’t changed a bit. And our view on value is absolutely as strong or probably stronger than where it was when we originally acquired these hotels. Remember, these hotels were not open, they were ramping up. The Four Seasons has a winery associated with it. That is very important to the overall luxury guest experience. That’s something that we have the winery was always a question mark of profitability. We have that working towards breakeven – close to breakeven next year, which was – which is a major feat. And so what we have done is we have de-risked these assets and they are absolutely on their way to achieve the returns that we expected at acquisition.

Your next question comes from Duane Pfennigwerth from Evercore ISI. Please go ahead.

Hey, thanks. Just on the Confidante, can you remind us and I know you touched on it in the call, but just remind us your renovation timeline, when that’s expected to be complete. And what you would think about a 2023 EBITDA contribution relative to this year?

Okay. Good morning, Duane. So when we acquired the Confidante, the plan was that there some renovation in non-guest facing areas would happen towards the end of this year, beginning of next year, but the majority of the actual repositioning would happen in the – in kind of the second half of next year after the high season. And for those that have done renovations and repositions in Miami, there’s the historic board you have to go through and some of the regulatory steps take a little bit. And so that is something that we are working through now and major construction will start in the second half of next year. Our view on when we acquired it on displacement for next year was that – our expectations was that the hotel would basically breakeven during the – having some EBITDA come in the high season and then obviously as a hotel, the rooms and all the public space and pools are being renovated that there would be lost during that time period. The hotel is performing very well this year. We’re able to grow rate or continue to grow rate even though the – some of the demand in the Miami market has softened the summer for some of the same reasons that we saw in wine country. But the hotel’s going to do $13 million to $14 million of EBITDA this year in its current condition. We will have next year – it will make money in the first half and then lose money in the second half. But given what it’s been able to achieve so far, we are very excited about this repositioning and we expect it to be able to hit all of our expectations once the debuts is beyond us.

Your next question comes from Michael Bellisario from Baird. Please go ahead.

Thanks. Good morning.

Good morning, Michael.

On capital allocation, Bryan, could you maybe update us on your view of buybacks versus acquisitions and what you’re seeing today and then just also how you think about the pace and cadence of buybacks, your stock price was lower, you still bought back stock, but you bought a less amount in terms of dollars than you did earlier in the year. Any color around those topics would be helpful. Thank you.

Sure. The way we look at capital allocation is kind of the same way we look at the portfolio we try to put together is we want to take a balanced approach. And when it comes to being able to successfully allocate capital and as we have done all year long, we look to – we look at internal capital investment, we’ll look at capital recycling and using some of the capacity on our balance sheet, and then we look at returning capital to our shareholders. And the trick is really the right balance between that and as our stock is lower, it obviously puts more emphasis on that return of capital through share repurchase. Capital investment is also tends to be some of our higher return alternatives. And so when we look at the Westin conversion, when we look at the rooms renovation we did at Hyatt, San Francisco and adding the pool in Wailea those are good return projects. And so when we look at our liquidity and while we have ample debt capacity, we do want to – we want to make sure we’re mindful of our liquidity in the near-term and make sure that we have enough liquidity available to not only repurchase shares, but then to also take advantage of opportunities. And given the current debt markets, with CMBS loans that come maturing over the next couple years, we have seen some deals either fall out of contract we’re starting to see things come back to market. And so it does appear that in the near to medium-term that we may see some interesting acquisition opportunities and having the capital and liquidity available to do that is something that we want to balance also. When it comes to share repurchase and dividend – return of capital through dividends, I think we’ve been very active relative to our market cap size all year. It’s something that we think is an important way to return capital and it’s something that we will continue to look to do. But there will be a – we’ll have to balance it with the other options. But as you’ve seen and as we’ve demonstrated it’s something that we look to continue to do if the investment is attractive.

Your next question comes from David Katz from Jefferies. Please go ahead.

Hi. Afternoon everyone or good morning, depending where you’re sitting. So I just wanted to look at the leverage and think about whether capital returns are a way that you would sort of raise that leverage. In other words, would you buy back stock or return capital as an activity or as a means to getting leverage up into more of the target range?

Yes. Well, I mean, it’s a good question and it’s a – let’s start with leverage. And leverage, we have some hotels ramping up and we have a hotel that’s going to be repositioned. But if you look at it on a somewhat normalized basis, I think we’re sitting at, call it 3.5x debt plus preferred to EBITDA, which is given where we are cyclically and given that we are still – many of our hotels are still behind occupancy in 2019. And a lot of our – we expect to have good growth in especially in Q1 of next year as we – as our big group hotels are compared against the Omicron impact of Q1 of this year. 3.5x is ample leverage to give a lot of capacity and optionality that’s higher than where it was a year ago where we did use our balance sheet to acquire assets. We recycled the Chicago assets, but then also used some of our balance sheet capacity and cash on hand to make our acquisitions of Confidante and the 25% of the Hilton San Diego, which sometimes gets lost in the shuffle. But was a – had debt associated with it and was a leveraging acquisition. But also at given where that hotel is performing at sub 12x this year EBITDA multiples was a fantastic acquisition. So we’ve already started down the path and we said we were going to do this of using – bringing our balance sheet back into an appropriate leverage level. So as we look forward and as we allocate capital going forward where share repurchase has and will continue to be one of the very attractive options out there that will absolutely come with additional leverage, because that’s the only way it will be done even if we’re recycling assets, it would result in more leverage. So that’s the plan. It has been the plan, it’s been what we’re executing on. And so, as we said before, we’re not going to be the highest lever to the group, but we also don’t think we’re going to be the lowest levered anymore either. And so that gives us capacity to allocate it through share repurchase, through acquisitions, through investment in our own portfolio.

Your next question comes from Anthony Powell from Barclays. Please go ahead.

Hi. Good Morning. I got a question along these lines on – good morning, on dispositions looking at the portfolio, I think at least two hotels look like they stick out as potential disposition candidates. Are those in the plans to maybe sell and could you recycle that into additional buybacks or acquisition activity?

When you look at our portfolio and the question is, do you need to – is there more to sell? I would say that the portfolio and granted we’re at 15 hotels now is a pretty solid portfolio. And if you go down the list in than the bottom of our portfolio are still pretty, pretty attractive hotels. So what I would say at this point is we’ve done the cleaning up of the portfolio, we exited the markets that we absolutely wanted to be out of. And going forward, everything is opportunistic. When it comes to selling an asset, we’ll look at disposing of an asset if we think that the assets life cycle or our investment life cycle in that asset has come to an end. So, any asset in our portfolio, if there is investment or something we think we can continue to do to it, where our return on invested capital should grow in the future than looking at our portfolio now than any asset that meets that criteria probably has a place in the asset at least for the medium-term. When we look to dispose of an asset, we’re going to – first of all, it could be any asset in the portfolio and it would meet the criteria of one, either there could be a higher, better use. Someone is willing to pay a very aggressive price for it and we can find better growth by redeploying that capital elsewhere. But as far as – are there things left on the bottom that need to go? Absolutely not. This is a fantastic portfolio. It provides us a lot of optionality and everything going forward will be purely opportunistic.

Your next question comes from Gregory Miller from Truist Securities. Please go ahead.

Hi. Thanks. Good morning. I’d also like to – I like to focus similarly to Smedes’ question on the Napa assets. And I was looking at the margins of the two properties between 2Q and 3Q. The Montage Hotel margins fell about 500 bps and the Four Seasons fell about 1,400 bps from my read. So I’m just curious if there’s anything specific that happened at the Four Seasons in 3Q that that might provide greater insights for us from a modeling perspective or any unusual one-time events? Or maybe more broadly if the margins for the Four Seasons in 3Q were similar to your expectations? Thanks.

When you look at these hotels, I mean, first of all, these hotels have high fixed costs. And the bottom line for the third quarter was that after a year or two, two-plus years of not having the option to travel internationally, a lot of our transient guests traveled and going to Europe is not something that people do every single year. And so there, while we saw pent-up demand in Q3 of last year, some of that pent-up demand worked its way out and left the market this quarter. That's fine, and I mean, that's not obviously what we would – we wanted, but it's understandable. As we look going forward and we look at these hotels and their profitability, that's why the group business that they have added and are adding for the back half of this year, but really into next year is so important because it brings – it brings that guest in. It brings the guest in at a very attractive rate with a lot of extra ancillary spend, which is needed in a hotel like this to have the margins that that we expect. And when that occupancy falls off because of the fixed cost you're going to see margin fluctuations more than you would in a full service or limited service hotel. It's just the nature of this type of asset, and so you'll see some more swings like this up and down, but at the end of the day, our view on the trajectory of this asset is the same. And our view on value and as we've seen in trades – recent trades is that this type of asset is highly desirable and the value of it does not fluctuate like you're running the mill upper upscale asset does.

Your next question comes from Floris van Dijkum from Compass Point. Please go ahead.

Thanks guys for taking my question.

Good morning, Floris.

Good morning. I promise you I won't – I won't ask the question on the – on your luxury or your ultra luxury hotels. But I had a question on your balance sheet and more specifically on your floating rate exposure. You have some of the highest floating rate exposure, I think in certainly in my hotel coverage universe. Maybe Aaron, if you could comment a little bit on your 57% floating rate exposure, how that could trend as the fed keeps raising the bar, if you will, and also what your – sort of your debt plans could be for the, I mean, you mentioned you said you're going to address your mortgage on the San Diego Hilton. But how you're thinking about potentially reducing some of that exposure to floating rate going forward or if there are caps in place?

Sure. Floris, thanks for the question. Yes, so you're right. So as of the end of third quarter we had roughly $800 million of total debt of which 42% was fixed or had been swapped to fixing the balance 58% or so was floating. Our floating rate loans have benefited over the last two years from a rather attractive interest rate environment. And the mortgage that you're referring to on Bayfront was effectively 1.3% debt for a number of years. So as we move into the backdrop of rising rates we're going to see and everyone else who has any degree of floating rate exposure is going to say in just expense move up here for a period.

Yes. As Bryan mentioned, we have overall a rather conservative leverage profile. So overall while we do have the 58% floating rate exposure, it's on a much lower overall debt load than – than you might see in other spots across the sector. So I think overall we're pretty, I think, well positioned to deal with the rising rate environment. As of the end of the quarter we were call out as Bryan mentioned, all in 3.5-ish or so times lever. So it's a rather conservative balance sheet. And based on where the trajectory, I think of where interests are at now and where they're expected to be over the next couple quarters. I don't think it's already viewed at the right time to try and do any kind of broad scale hedging in terms of locking in anything now. So we'll keep our eye out over the coming months to see how rates transpire and there might be a window to lock in some incremental portions of our interest rate exposure and maybe hedge some of that that way. But just if you just look at the overall interest – our overall leverage level and our weighted average interest of call it in the low-4s and you think about where our preferred are at, I think our balance sheet actually is actually – is actually pretty well positioned to withstand some – the rising rate environment. So we'll keep our real see if it makes sense to add some incremental swaps here and there but it'll just time will tell.

Yes. And like Aaron said, it's something that we can do gradually. We can – we don't have to swap out the entire amount of a term loan. We can do it in both in term and dollar amount. We can do it in increments over time. So it's something that we're looking at now and as Aaron said too it, with our leverage where it is, if we were 5, 6 times levered we would probably be looking at things differently. But that's why you have a balance sheet like we have. It provides optionality and flexibility.

[Operator Instructions] Your next question comes from Daniel Adam from J.P. Morgan. Please go ahead.

Hi, thanks for taking the question. I'm curious if you think non-room related strength can be sustained next year given what will likely be a much weaker macro environment? Thanks.

It's a good question. When we look at our group strength and the out room spend this year, we actually feel very good about it next year because when we look at some of our hotels, let's take Wailea, for example. When we look at group business there and you have strong transient demand, that's a hotel where as this year has gone on and as we get into next year, we're becoming more and more selective with the type of group. So we're taking a better quality group there that has a better spend. We're seeing the same thing in Orlando, in San Diego and so while we have in some of the hotels that have a little bit more capacity, it'll be a combination of bringing in additional groups with that spend. But in other hotels it's really being very selective in making sure that you are getting the type of groups that you want that that are spending more. And then when you look at the composition of the spend this year, it's still – we're still growing that group base. And that group base is still well below where we were in 2019, and there's a lot of room to grow. That is – that's something that will help us continue to bring in more of those – that group business.

There are no further questions at this time. I will turn the call back over to Bryan Giglia, the CEO for closing remarks.

Great. Well thank you everyone for the interest and support in the company, and we look forward to seeing you at Nareit and the upcoming conferences. Have a good day.

This concludes today's conference call. You may now disconnect. Thank you.