Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Sunstone Hotel Investors Third Quarter 2023 Earnings 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 this conference is being recorded today, November 7, 2023 at 12 PM Eastern time. I will now turn the presentation over to Mr. Aaron Reyes, Chief Financial Officer. Please go ahead.

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 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 commentary on this call may contain non-GAAP financial information, including adjusted EBITDAre, adjusted FFO, and property level adjusted EBITDAre. We are providing this information as a supplement to information prepared in accordance with generally accepted accounting principles. Additional details on our quarterly results 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. Brian will start us off with some commentary on our third quarter operations and recent trends and also provide some additional color on our recent disposition about Park Plaza. Afterwards, Robert will discuss our capital investment activity. And finally, I will provide a summary of our current liquidity position, recap our third quarter earnings results, and provide some additional details on our outlook for 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 Brian. Please go ahead.

Thank you, Aaron and good morning, everyone. We were encouraged by our performance in the third quarter as we managed to deliver earnings that exceeded expectations despite moderating leisure demand and disruption at one of our largest assets following the tragic Maui fires in early August. We have a fantastic team of associates at the Wailea Beach Resort, and we are grateful for their dedication and resilience in recent weeks. Later, we will share some additional details on the fire's impact on our third quarter results and expectations for the remainder of the year. Elsewhere across the portfolio, we continue to see solid attendance at group events and further growth in business transient demand. While softer year-over-year performance at our oceanfront resorts offset some of the urban strength, we worked with our operators to mitigate costs, which combined with savings in corporate-level expenses led to EBITDA and FFO above the high-end of our guidance ranges. Similar to Q2, growth in the third quarter was the result of robust group business and increased corporate travel. In fact, our urban and convention hotels delivered a very strong 7.4% RevPAR growth in the quarter driven by gains in both occupancy and rate. Washington D.C. led the portfolio growing RevPAR by more than 34% in the quarter as the hotel begins to benefit from our investment to reposition it as a flagship Westin and making it one of the premier conventions and transient hotels in the city. The renovated hotel looks great. With fantastic guest rooms and bathrooms, expanded and fully redesigned meeting space, a vibrant modern lobby, and the largest hotel fitness studio in the city. The former Renaissance was relaunched at the Westin Washington D.C. downtown last month and will contribute to meaningful growth in the coming quarters as the hotel is…

Thanks. As Bryan noted, the third quarter was a productive one for us. After a multiyear renovation, we converted the former Renaissance to the Westin Washington D.C. Downtown in early October. The transformation has been remarkable with a fully refreshed hotel that incorporates the Westin brand's signature biophilic design elements. We are very pleased with the initial response and the type and volume of bookings the hotel is already attracting. As some of you may have seen in our presentation from September, we finalized the renovation scope for Andaz Miami Beach and the demolition work began last month. In addition to the renovation scope we outlined at the time of acquisition, we have also identified several additional ROI opportunities that we expect will enhance earnings at the resort. We are excited to partner with Jose Andres Group to debut Bizarre Me! In Miami Beach. This signature dining concept will not only enhance the luxury experience of the resort, but will also be a destination to attract non-hotel guests to the property and drive additional revenue and earnings for us. Our total repositioning investment is estimated at $70 million and we continue to expect the hotel will deliver an 8% to 9% yield on our all-in basis in the resort upon stabilization. As we have shared with you before, our business plan at Andaz is very similar to what we did at Wailea Beach Resort, which is to reasonably elevate a well-located resort and position it to benefit from its higher rated luxury neighboring properties. We employed a rational approach to our underwriting, which focused on the pre-pandemic rate environment in Miami Beach, and while leisure travel patterns have been normalizing following tremendous upward momentum in rates coming out of the pandemic, the resulting current rates in the market are still…

Thanks, Robert. The sale of Boston Park Plaza further bolsters what was in already strong liquidity position. Including the net proceeds from the sale, we have nearly $540 million of total cash and cash equivalents including our restricted cash. We retain full capacity on our credit facility which together with cash on hand equates to over $1 billion of total liquidity. We have addressed all debt maturities through December 2024 and as of the end of third quarter, our pro forma net debt and preferred equity to EBITDA stood at 2.6 times and our net debt to EBITDA was only 1.4 times. As the net proceeds from the Boston Park Plaza sale will reduce overall leverage by about one turn until they are reinvested. Shifting to our financial results, the full details of which are provided in our earnings release and our supplemental. Adjusted EBITDAre for the third quarter was $64 million, which was above the high end of our guidance range, driven by higher non-rooms revenue, better margin performance across the portfolio, and lower corporate level costs. We estimate that our third quarter results were impacted by approximately $1 million of lower earnings due to the fires in Maui and $2 million of displaced EBITDA related to the renovation work at our hotel in Washington DC. Adjusted FFO for the third quarter was $0.23 per diluted share which was also above the high end of our guidance range. As we look to the fourth quarter, we expect that total portfolio RevPAR will range from a decline of 3% to a decline of 6% as compared to the fourth quarter of 2022. This range does not include Boston Park Plaza due to its sale, that does include the Confidante Miami Beach, which is now under renovation. If we exclude the…

[Operator Instructions]. Your first question comes from the line of Dori Kesten with Wells Fargo. Please go ahead.

Thanks. I guess one, one, and half questions. With the pushback of CapEx do you still expect the renovation rebranding of the Andaz, Miami Beach to be completed in '24?

Yes. With the movement that we had in the spend, that's really just fine tuning when the money will be going out the door and has really nothing to do with our ultimate completion date. We had a little bit more ability to, in the beginning we weren't, we didn't have the schedule locked down, so we didn't know exactly when things would start and when money would start going out the door. But now that we have been able to start the construction which is going on right now. We just fine tune what our spend would be and when that would be. And so, the completion date is still on target.

And then, can you just walk through your material headwinds and tailwinds to EBITDA that you have, that you can see today for 2024 just beyond general market conditions?

Sure. So, starting with the markets that we're in for '24 from a citywide standpoint, DC is a strong market in New Orleans and San Diego are all strong on the citywide calendar next year. DC will also benefit from the comping over the renovation year and then also the benefits of what we're seeing with the Western brand, which should come in room nights and transient room nights and also in rates, I think paces up pretty significantly for the hotel next year, as we start working back to our target group room budget that we have for that. So, success in DC is going to be making sure that we layer on the right mix of group at the right time of year. DC does have some seasonality to it. So, in the prime time really leveraging off the Western brand and being able to get the higher-end corporate group and then bringing in higher-end association and some of the shoulder periods too. And then using the appeal of the brand to drive more transient business then we were able to as a renaissance. Looking out at the others obviously, we have the Andaz that will be under construction until the end of the year. So that will be a headwind. Long Beach, as Aaron mentioned, we have it in the renovation starting in Q4 this year will go into Q1 of next year, and then start to ramp up after that. The brand change will be beneficial to the hotel, but the renovation is really a slightly upgraded routine renovation that we would have done anyway. And so, the timeframe is pretty condensed, and the disruption period will be minimal. Looking out for the rest of next year also. As far as the rest of the portfolio, we would expect the urban and group hotels to continue to lead. There's probably some more occupancy in the portfolio is when you look at the composition between occupancy and rate, we probably expecting a little bit more occupancy next year. And then, certain markets, San Francisco is rough on the citywide calendar, but based on our ability to drive in house group and take advantage of the corporate and business transient travel that we've found in the financial area and in Embarcadero. We would expect to continue that. But that market, we have significant year-over-year growth this year. That's obviously going to slow as the hotel lapsed over the comps from this year.

Your next question comes from the line of Smedes Rose with Citi. Please go ahead.

Hi, thanks. I just wanted to ask you if you could talk a little bit more about the sort of transaction market and maybe how you're thinking about the redeployment. It sounds like you'd like to go in a stabilized yield to the maybe the sort of longer-term opportunities over time, but not kind of the massive conversion sort of opportunity necessarily like you're doing at the Andaz now. And I'm just wondering are those deals available 12 times EBITDA? Or are you willing to maybe pay slightly higher going in because you feel like over time, you can get a better value? Just help us sort of think about your thoughts there and maybe for what kinds of hotels we're looking at urban resort all things equal?

Absolutely. Good morning, Smedes. So, when you look just I'll spend a second on the transaction market and then move to us specifically. So, we mentioned on the call that we are starting to see some convergence in buyer and seller expectations. To add to that, that is more skewed to the urban and group hotels than the resort hotels. I think what we are seeing now is pricing is more, it's closer to our expectations and more rational on that type of hotel than the resorts. The resorts are obviously trying to determine what the normalized leisure demand is. The last couple of quarters have obviously been soft in many resorts and higher-end resort markets, combine that with some coastal insurance costs. And what the resorts were doing nine months, 12 months ago. Seller sometimes get locked in on a value and it takes a while to come to a view of what current market is. So, when talking about types of hotel, I think it would be more likely that we are going to find what we are looking for. And again, you mentioned it. But what we're looking for is a strong going in yield. When we look at recycling out of Boston, and Boston is a great market and Boston Park Plaza is a great hotel. And we talked about the many reasons why it was time for our ownership to be done there. But a strong yield going into to come close to or match that is going to be important. Minimal near-term capital is near-term capital needs, will be important also. We have our big turn going on. We have DC that came off of renovation and is now ramping up which is fantastic. We have on doors where we believe we are adding…

Your next question comes from the line of Duane Pfennigwerth with Evercore ISI. Please go ahead.

Thank you. What sort of payout ratio are you targeting for the top-up dividend in 4Q basically annual as a percent of AFFO?

Good morning, Duane. I'll start with that and then Aaron can get into some of the specifics. We're targeting to distribute a 100% of our taxable income. That's in the payout ratio sometimes is easier for other asset classes. I think for lodging it and feedback we've received from shareholders is that pay out your taxable income. In last quarter, we up our base dividend to $0.07 a share to reflect on a run rate basis close to where our taxable income would be in a multiyear basis, knowing that it's almost impossible, but doing lodging to set that, because of the cash flow will move. And so, if you look at that on a run rate basis. You've got two quarters of the $0.07, you have two quarters in the $0.05, so there's $0.04 of embedded catch up there. And then, whatever our taxable income is for the rest, we would then pay out that balance. Aaron do you have?

Yes. So just to add some extra color to what Brian was saying. So, ultimately, the final determination of the amount of the dividend will be something that the board decisions. But, well, the board will decide, but I can kind of share with you some of the data points that might go into that decision-making process. So, as Brian noted, we did increase our kind of our regular run rate dividend by about 40% from $0.05 to $0.07 a share. And then as we have done in the past. We have seized the catch up or the top-up dividend, as you noted, to effectively approximate our remaining undistributed taxable income. And so that's a number that's going to kind of continue to move around as we move towards the end of the year. But I think kind of a realistic run rate for that right now might be an incremental call it $0.05 to $0.07 per share, in addition to the base quarterly a $0.07 amount so that we'd be looking at something kind of in the neighborhood of $0.12 to $0.14 per share. And then as Brian had alluded to, the increased $0.07 run rate would effectively have picked up and distributed the bulk of that income had we assumed it been in place for Q1 to Q4. In addition to the dividend, we've also have done the share repurchase activity that Brian mentioned. So, we'll be back, around in December consistent with past practice to declare that final dividend. And so, once the board has made that decision, we'll make that note.

And then just on the wine country assets, can you speak to what drove the improvement? I know you talked about some revenue management changes and tweaks in the past. Was it more cost savings? Anything you could highlight that you felt drove that improvement? Thanks for taking the questions.

Absolutely. It was a bit of everything. It was, we've talked about the strategy of adding the right amount of group into these hotels, which we were able to realize in the quarter, still working again, say, difficult leisure backdrop, especially a luxury leisure backdrop. So, when you look at the two hotels, the Four Seasons had much more group on the books than Montage did. But when you look at this type of hotel, when you look at a Wailea, even a San Diego, it helps to not only focus it at RevPAR, but also to look at total RevPAR. And while RevPAR was down, at Montage and up at Four Seasons, total RevPAR was close to flat at Montage and up significantly at Four Seasons. And the reason for that is, is that to get the group business in there, you want to rationalize the rate and to make sure that the rate is the appropriate rate because each of the hotels that you're getting somewhere between $800 and $1,000 a night per group room of ancillary spend. That combined with some of the efficiency initiatives that we started to undertake, beginning at the Montage and then rolling some of those over to the Four Seasons. The Montage is farther ahead, at that point, and you can see that in the profitability. So, it really is bringing in the right group, bringing in the right group at the right price, and then making the operation as efficient as possible. And in Q3, we just we start to see what these resorts can produce. And once that leisure component starts to come in, we'll then be able to really realize what these resorts can do.

Your next question comes from the line of Michael Bellisario with Baird. Please go ahead.

Thanks, good morning, everyone. Just one more clarification, on the tax. If you don't do a 1031, you'll have less or maybe presumably no NOLs left for '24 and beyond. So, then you'd have more upward pressure on the dividend in the out years. Is that correct? If there's no 1031, is that the right way to think about the bucketing?

If there is, so first of all, with the NOLs we're sitting at… Yes, Mike. So, the gain that's anticipated for the sale of Boston is approximately $150 million or so. That is within our, the amount of NOLs that we have in totality, which is kind of around $350 million or so. So, we would have incremental capacity on top of the Boston sale, if indeed, we did not 1031 that transaction. So, we would still have several $100 million of NOLs to shield future gains. And then just from a technical standpoint then if you look at, if we were to do a 1031, Mike, you go back far enough, and for those that do. The Boston basis was a continuation of the Rochester basis. And so that depreciation shield of that hotel is not as large as you would expect it to be given the size of the hotel. And so, if we were to do a 1031, then that lower basis would go into the new acquisition. If for whatever reason we did not find something appropriate within the 1031 timeframe and we were to use our NOLs to shield that, we would actually, and then actually acquire something, we would have a higher depreciation basis, which would put less pressure on dividends going forward because then our basis would step up to the actual value of whatever asset you're buying.

And that is from the way back machine. My second question, just on the expense side, probably for Aaron. Just can you walk through some of the margin headwinds that you saw in the third quarter and then what's embedded in your fourth quarter guidance on the margin front?

So again, I think the one that's the most obvious that we've been well publicized is property insurance. So, as we think about the renewal that we did, was on effectively July 1. So, Q3 was the first quarter of the new run rate. And that accounts for about 60 basis points, of margin headwind. And then on top of that, we had an incremental 30 basis points margin headwind just from the situation, in Wailea and the kind of change in the mix of business that we had there. And kind of elsewhere across the portfolio, we've seen some moderation in wage rates, and call it in that kind of 4% to 5% area. And then a bit of relief, in utilities and a couple other operating expenses. But the primary one is it would property insurance renewal.

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

Good morning, guys. So, with the announcement on Renaissance Long Beach going to Marriott, you guys, I think we'll have one Renaissance left, right, down in Orlando. I know you've sold or converted a bunch. So, I guess the next logical question is there a kind of a next-up plan for the Orlando Renaissance?

When trying to pick what brand is best for any asset, sometimes the brands just not available. And so, it's already in the market, there's area protections, there's saturation. And so that always comes into play and there is if you look at the Orlando market, there's a lot of everything there. So that would be the first hurdle. When looking at the Renaissance brand, and what we found because we have been a large owner of Renaissance over time is that, it's kind of a bifurcated result. And what I mean by that is from a group perspective, if you have a great group box and you have good meeting space and good amenities and high service levels, it can really perform well. The Renaissance Washington DC from a group perspective did a fantastic job. It held its own and it kept market share and perform really well. Where it didn't do as well was on the transient side because while a group customer can come and understand the product and walk it and see what their clients are going to get. The transient customer doesn't have that ability and so they go with what they're familiar with or what they have experienced within the Westin brand from a transient standpoint is just much better. Marriott brand is a stronger, better identifiable brand. So, in Orlando, we have fantastic meeting space. We have the ability to give the group more space per group room than they would typically get in another hotel. We also while it's almost 800 room hotel, it's smaller when you look at the size hotels that you can find in Orlando. And so, a group can have run of house. And they can control, they're not group number two or three in-house, they can be the main group. And so, reasons like that Orlando has done really well. From a leisure standpoint in Orlando, it's always going to fall behind the parks. It's going it's a sort of a convenient in between location between Universal and Disney, but it's in between Universal and Disney too. And so, from that standpoint, I think Orlando can continue to do very well as is. Now there may be some things longer term that we can new to make it a little bit more appealing to the leisure side, given that market. But as far as what we've done with some of the other hotels. Does that mean we have to do something with Orlando? No, Orlando can do just fine, and really do well as a Renaissance as it has done.

Your next question comes from the line of Anthony Powell with Barclays. Please go ahead.

Good morning. I guess a question on Maui. It seems like trends before the wildfires were actually pretty good, especially relative to some of the other leisure markets. Where do you see Maui in terms of this normalization? Can we talked about across leisure? Is there more to come there? Do you think Maui may be able to avoid some of that normalization, once you kind of factor out the impact of the wildfires?

So, Maui had done really well last year into this year and didn't see the initial wave of leisure normalization, as some of the other coastal markets did. Our expectation for Q3 prior to the fire was that we were going to start to see that in Maui. And that we would see some leisure pullback. And we were starting to see that in the beginning of the quarter. And then we at that point right prior to the fire we started seeing transient reservations pick up. And so, we were encouraged that Maui was going to whether that storm pretty well. And then unfortunately, the fire happened and that changed the dynamic of the entire market and changed Wailea for a period of time where it's just that mix of business was completely different. And the hotel did a fantastic job of taking care of all the associates at the hotel and then taking care of the guests which were not their typical guests, they were guests that were either displaced or going to help during the day. And so, while the hotel was running at a decent occupancy there was really no one around during the day and that's not really how that hotel works. And so, one we've been very pleasantly surprised at how quickly the market and the Wailea market has reverted back to its normal business. And as we go forward and we look into Q4, there is some, on the shoulder periods and going into through October and into November. It's a little leisure softer than what it was, but we are really encouraged by what we're seeing with during the festive weeks. So, once you get into the holiday season, we're actually trending ahead of last year. And like we saw before the fires, back in July and then to the beginning of August, we're starting to see that transient pick up again, going into the fourth quarter and into next year. So, the answer is there's been a lot of change happening in Maui over the last few months. So, we're going to need to see how things normalize. But from what we've seen so far, it's more encouraging than maybe some of the other leisure markets. But to your initial question, it's not immune from it. But it is seems to have fared better and what we're seeing right now is definitely encouraging.

Your final question comes from the line of Floris Van Dijkum with Compass Point. Please go ahead.

Thanks for taking my question. Brian, maybe just to follow-up on Smedes question in terms of reinvesting some of the proceeds. You talked a little bit about some of the things you're considering. Obviously, one of the other things to think about is, have you considered as opposed to buying one asset, splitting that up into two assets or reducing the capital need. Are there tax implications with that? Or can you still 1031 and if you split it among a couple of assets?

You can you can definitely exchange in morning for us. You can definitely exchange into multiple assets. And that's something that we are absolutely looking at, because additional diversity in the portfolio would be a plus. So that's something we're absolutely evaluating. Again, I think based on what we're seeing now, it looks like it is skewed more towards the urban group type hotels. And again, it doesn't have to be all or it doesn't have to be and it will not be all or nothing. It can be a partial 1031 exchange and then we might wait for a bit if we're not finding the deal. Remember, we understand that it's important to, if we're trying to deploy capital into an asset right now, it has to be a good deal. And we are out there trying to identify and using the leverage we have to find a good deal. If it doesn't then we will let the 1031 expire. We have the option to use the NOLs to hold on to that capital but then we'll also most likely be deploying that capital into our own stock depending on where our price is. And that I think over the last two years we've given a lot of data points of where we think that that price is. So that's something where I think we've been as active as anyone and have demonstrated that we are absolutely not shy of deploying money through our, into our own currency. So, the answer to your question, yes, it can be multiple assets, it may be multiple assets, it may be one asset. We will have more information as time goes on and we will absolutely update investors and the market on that.

And maybe if I can have the follow-on, on that. What we're hearing from the market obviously, is that larger assets because the financing markets are more difficult, tend to trade at bigger discounts than smaller assets. How do you weigh those two if you're potentially buying smaller assets that might where the bite size is maybe $100 million or less versus maybe getting a perhaps slightly more attractive yield on something that is a larger size?

It is like everything, it's a balance. And it depends on the opportunity. And is there a size that while it could be a good deal, might start to get too large or create concentration risks in the portfolio? And that's something we would to evaluate. I think our, sweet spot here of what we would be looking for would be something to deploy a portion of the proceeds into and leave some remaining proceeds to deploy through stock or through another asset at a later time. But if you look at what we've done in the past, I think we've been pretty balanced. So that's what we'll continue to look to achieve.

Thank you. Ladies and gentlemen, there are no further questions at this time. I will now turn the call back over to Bryan Giglia, Chief Executive Officer, for closing remarks. Please go ahead.

Thank you everyone for your interest and we look forward to seeing you at upcoming conferences and meetings over the next month or two. Thank you.

Ladies and gentlemen, that concludes today's call. Thank you all for joining and you may now disconnect your lines.