Good morning, ladies and gentlemen and thank you for standing by. Welcome to the Sunstone Hotel Investors Second Quarter 2024 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, August 07, 2024, 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. 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 the commentary on this call will 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 in the Investor Relations section of 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 highlights from our second quarter, including commentary on operations and recent trends. Afterward, Robert will discuss our capital investment activity and finally, I will provide a summary of our second quarter earnings results and share the details of our updated outlook for 2024. 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. Overall, it was a productive quarter at Sunstone as we executed on all aspects of our strategy, recycling capital and closing on the previously announced acquisition of the Hyatt Regency San Antonio Riverwalk. Further investing in our portfolio, completing work on one value-creating brand conversion and making further progress on the next, and returning capital to our shareholders through increased dividend and share repurchases. Our second quarter earnings were in line with expectations as stronger ancillary revenues and successful cost controls offset softer leisure room revenue growth. While the near-term outlook for industry revenue growth has moderated, we believe that many of the primary drivers of the lowered expectations are isolated or short-term in nature and that the Sunstone growth story remains intact. We continue to be optimistic about our earnings potential as we move into 2025, which is largely driven by the contribution of our recently completed and in-progress investment activity, and less dependent on moving solely with market RevPAR trends. Later in the call, we will share some additional commentary on the various growth drivers we have across the portfolio. But before that, let's review some of the additional details on our second quarter performance. During the quarter, we saw continued strength in Group activity and further recovery in business transient demand. While the backdrop for leisure travel was more mixed, there has been some encouraging signs at our wine-country resorts. These are the result of our work to redefine the cost model while providing a world-class luxury experience and our efforts to increase the Group mix to drive incremental business at both resorts. Our convention hotels once again led the portfolio this quarter, driven by the continued benefit from our newly converted Westin Washington, D.C. Downtown, which grew RevPAR by…

Thanks, Bryan. Early in the quarter, we've closed on our previously announced acquisition of the Hyatt Regency San Antonio Riverwalk and we are very pleased with the hotel's initial performance. The market is healthy and we are already seeing the results of our asset management initiatives at the property. In fact, we now expect the first-year yield on our net purchase price will be closer to 9%, which is incredibly attractive for an asset of this quality. This higher projection is 100 basis points that ahead of our underwriting and represents meaningful accretion on the recycling of capital from the disposition of Boston Park Plaza. We retain the remaining proceeds from the sale that we can use to create further shareholder value either through additional hotel acquisitions or the repurchase of our stock. During the quarter, we also made additional progress on several other investments across the portfolio. As Bryan noted already, the renovation is in full swing at the soon-to-debut Andaz Miami Beach. As the first phases of the construction are nearing completion, we are now also working with the hotel team to prepare for the opening. We are pleased with the 2025 Group booking activity we have completed to date and will soon be opening up transient reservation channels for stays beginning in December. We continue to be pleased with the progress being made on what is a very comprehensive reimagining of the resort. While the recent softer demand environment in Wailea has been disappointing, we are using the opportunity to move more efficiently through the soft goods rooms renovation we have underway at the resort. As you can see from the property level data that we make available, our upper upscale property achieves robust rates and competes very effectively with its nearby luxury piers and so a refreshed room product will allow it to continue to do so. We will be performing the remaining work around peak periods and do not anticipate any meaningful disruption at the hotel. Elsewhere across the portfolio, we will be completing a few other projects, including a meeting space renovation at our JW Marriott New Orleans, which is underway now, and will be completed in October in order to take advantage of robust Group business during the fourth quarter. At Montage Healdsburg, we added a small event facility at the resort's showcase vineyard venue that will allow us to generate incremental sales while also driving staffing efficiencies and contributing to higher margins. While these are smaller projects, they will add to the earnings potential and value of our portfolio. As we have shared with you before, capital recycling is a primary component of our strategy, and while we are actively evaluating additional acquisition opportunities, we remain mindful of all capital allocation opportunities available to us and the relative returns offered from each at various points in time. We will be disciplined and balanced in our approach. With that, I'll turn it over to Aaron. Please go ahead.

Thanks, Robert. Our earnings results for the second quarter came in generally in line with expectations as higher ancillary revenue and contribution from certain corporate-level items offset lower RevPAR performance. Adjusted EBITDAre for the second quarter was approximately $74 million, and adjusted FFO was $0.28 per diluted share. Our quarterly results reflect the impact of the extended completion of the renovation work at our hotel in Long Beach, which resulted in $3 million of estimated EBITDA displacement in the quarter, approximately $1.5 million higher than anticipated. Together with approximately $9.5 million of year-over-year decrease in earnings at the Confidante as it undergoes its transformation to Andaz Miami Beach, we now estimate that we will incur $15 million to $16 million of total earnings disruption this year. Now that the work is completed in Long Beach and as we get closer to the debut of Andaz, we look forward to recouping all of this displacement, plus additional earnings at these hotels next year. Included in our earnings release this morning with our revised outlook for the year. As Brian noted earlier, we have lowered our full-year expectations for RevPAR growth and earnings. The change is primarily related to the extended timing of completion of the renovation in Long Beach and a softer leisure trends we have seen in Wailea, which together are impacting growth and full-year RevPAR by over 200 basis points. Based on what we see today, we expect that our total portfolio full-year RevPAR growth, which includes all hotels in the portfolio will range from a decline of 25 basis points to an increase of 1.75% as compared to 2023. If we exclude the Confidante Miami Beach, RevPAR growth is projected to range from 2.25% to 4.25%. As a reference point for our updated guidance range, the full-year 2023…

[Operator Instructions] Your first question comes from the line of Michael Bellisario with Baird. Please go ahead.

Thanks. Good morning, everyone.

Good morning, Mike.

Good morning, Michael.

Bryan, kind of big picture question for you. Just, can you remind us, review your view of value, what the Board's view is, how they think about it, the path to get to that number, and then maybe how you're thinking both about the things you can and cannot control in order to help close that valuation GAAP. Thanks.

Yes. Well, we look at value and it's something that we spend a lot of time with the Board at every board meeting on, and like any other hotel investor, we look at it from multiple ways. We look at it on a cash flow basis. We look at it on a relative multiple. We look at it on a replacement cost. So we use all those. We triangulate on our view of value. And the way that that plays into our capital allocation strategy is at times when we see that deficit, we can do things such as what we did at Boston Park Plaza where we monetize and then we can use those to get the private market values and then go and either reinvest that into new growth opportunities or into our stock. And if you look over the last couple of years, I think our approach has been very balanced in that and that as we look forward, we have a great portfolio. We have great hotels and great markets. We have great internal growth that we've been able to build up on over the last couple of years and they are now at a point where we have a cadence of hotels coming off of renovation and providing earnings like with D.C. and going to Long Beach and Andaz next year. We have ramping hotels, San Antonio, one where we deployed that capital has done really well for us and is a market that we're very excited about for several years to come and we're very happy with this as Robert said, almost a nine yield on that investment in that first year. And then, of course, it is also what we have done consistently over the last couple of years is when the stock gets to a meaningful GAAP is that we've been able to repurchase shares and that's something that we did again in the quarter recently and have that balance sheet capacity and that flexibility to be able to pull on any of these levers at any time and they change depending on where our valuation and where that GAAP is.

Your next question comes from the line of Dori Kesten with Wells Fargo. Please go ahead.

Thanks. Good morning. During your preparatory remarks, you described some leisure pricing as normalizing, but are there any hotels in your portfolio where you're seeing true price sensitivity at the margin?

I'm sorry, Dori, the last part of that --

What is the end of this -- part of that?

Where you're seeing this the true price sensitivity at the margin?

One market we've talked about, Key West has been one where there has been more price sensitivity. We have been able to capture some more occupancy there, but that's one where maybe it's a little bit more sensitive and whether that's competing options for the traveler, whether it be cruises or other items plays into that a little bit more. Other markets, I don't think that we've seen that as much. One market where not on the leisure side but on the Group side, we've rationalized our pricing has been in Napa, which has been very successful where we're bringing in additional Group and you'll see, when you go through the supplementals, you'll see the rates are lower and that's because we're adding occupancy. We're taking the Group at a more rational rate, which obviously fluctuates over the different demand periods but then we're getting that ancillary spend where at Montage it's $700, $800, at Four Seasons it's $900 to $1,000 a day per Group room and that is between that and our productivity measures that we put in place, you're seeing the cash flow for both of those assets increase dramatically.

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

Hi, thanks. I appreciate it. Just on Maui, given the asset level disclosure that you give us, the market doesn't really look that off or it's at least hard to tell in the disclosure that you've given. Can you talk specifically about how your assumptions have changed in the back half of the year, maybe 3Q versus 4Q? And if there's specific Groups or seasonal periods that really impacted the forecast. Thanks for taking the question.

Thanks, Duane. Good afternoon. So with Maui, I mean, your point is exactly right. When you look at it supplements -- it's down, but it's not down a lot. At the end of the day, this is a hotel that's going to run around 70% occupancy at a high $600 rate. It is a meaningful hotel in our portfolio and we have a concentrated portfolio. And if you have a concentrated portfolio, you want to make sure that you have great real estate, you have good market exposure and you have the ability to create value both internally with those assets and externally and Maui is a asset that is an exceptional piece of real estate. And when you look at our position within the Wailea market, it is one of the better luxury resort markets in the world and we're the value proposition there. We have an outstanding 22 acres, multiple pools, some of the closest rooms to the water that you can have and we compete with some very high-end luxury product in that market. What we started seeing in the second quarter is which tends to be a heavier leisure quarter than Group quarter is that some of the leisure demand did moderate a bit and as we got into then looking at our projections going forward, the third quarter, the Group business really starts in like September and then runs through towards the festive season. So from a Group standpoint, the Group demand is still very good and our Group pace is very good. It's just that Group kicks in in September. And when we looked at the leisure and more of the summer traveler, whether it's a combination of still traveling abroad or other destinations, whether it be Mexico or Europe, is that there wasn't Group to help insulate that weakness. And so when we look at the guidance and the change to the guidance, it really is that impact in the third quarter and while the tourism authorities and multiple stakeholders are doing promotions and other things to remind the traveler what a wonderful experience Maui is, it still is a longer booking window by. And so even with that going in, our assumption is that that's not going to kick in until maybe September and then into the fourth quarter and September, we already have very good Group base and not a lot of additional rooms to sell to take advantage of that. And then probably, the most important period of the year would be the festive period in December. Rate is down a couple percent for that, but occupancy is up over 10% right now. And so when we look at a hotel or a resort-like Maui, you really look at total RevPAR. And when we look at occupancy going up that much on a pace basis, that should bode well for the back end of the year.

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

Hi, thank you. I wanted to ask you about, I guess, as the Andaz comes close to being back online and should be a pretty big contributor into next year. Could you just talk about, I guess, how you're thinking about the mix of business there for Group versus leisure? And just with that is, I know you mentioned that it's on time. Does it remain on budget relative to what you've shared previously?

Good afternoon, Smedes. So Andaz is in full renovation right now as we've told you before, the hotel was shut down to really expedite the renovation. The ultimate mix for that hotel is probably right around 25% Group. Miami Beach is a very high transient leisure market. We did through the renovation, add more suites to be able to accommodate Groups and we also have -- there's also some non-food and beverage Group business that the hotel can do too and so our plan is to have renovation wrapping up for the most part in the fourth quarter, be looking to the reservation line isn't open quite yet, but looking to book rooms in December, use (ph) December, which is a good demand period, but use December as a time to fine-tune the operation. So come the beginning of next year, when we -- and I believe most of the investors are counting on the earnings from the hotel that really kick in as part of our 2025 growth to be in a great position for that, that's also a higher leisure time period. So transient bookings can fill the hotel at that point. We do have a sales team that is fully engaged right now, and they are booking business. That business is probably, you want to leave a little bit of time to get things running right. So that business is probably looking to come in mid to late January into February, but that we are putting business on the books right now. We are getting a great reception. The pools are coming into shape now, the backyard is coming into shape and you're starting to see, the vision is becoming a little bit clearer, which is exciting for Groups. As far as timing, timing is still for the fourth quarter. And I would say that as far as the budget of it goes, our last update, we're roughly around those numbers right now. So a lot of moving pieces, but we feel very confident with this being completed and ready to go. And most importantly, creating EBITDA going into next year.

Your next question comes from the line of David Katz with Jeffries. Please go ahead.

Hi, thank you. Can you talk a bit about Napa and how you -- what you're seeing up there and if that is encompassing the leisure trends that you cited earlier and just how you're doing with those two assets, please? Thank you.

Sure. Good afternoon, David. So in the second quarter starting with Montage -- and remember these from a Group side, these are always going to be a little bit lumpy because you're going to have buyouts, you're going to have other bigger pieces of business that kind of come and go. Montage Group, it had some buyouts, it had a buyout wedding last year. Group was down a little bit, but we had good transient pickup for the quarter, I think transient was up about 14%, Group was down a couple of percent and our total, because that Group was down, our total RevPAR was down a point or so. Even with that, with taking -- with having the Group base in there and also driving the ancillary revenues. And then also remember that the Montage will farther along in our productivity measures. The resort produced $800,000 of more EBITDA than it did the prior year, even with RevPAR being down. So it's showing that we were able to work with the operator, get the efficiencies that we thought were appropriate, and then also maintaining the service levels of a true luxury hotel. Looking forward for the rest of the year, Group pace is very strong in Q3 and we're on track to be right around the Group number that we thought we would be, call it 13,000 or 14,000 room nights. When we look into next year, we're very excited about Montage because we are up $3 million in room revenue pace, about 70%. And so again, the cost model is there. We're starting to see some positives on the transient side and the Group business and that ancillary spend and most importantly, the total RevPAR is producing. For Four Seasons, Four Seasons had a very good Group. In Q2, we are implementing some of our productivity measures there. So they're not fully realized. The Michelin Star Restaurant has – is increasing it’s -- had increased its number of nights, has increased its revenue, is doing very well, and bringing a lot of notoriety and people to the resort and our profits were up again year-over-year, about half a million dollars at that asset. So again, doing very well. As we look into next year, the Group room nights pace is up about 11%. As I said earlier, rate is down a little bit but that is by design to capture the ancillary spend, which is on the (indiscernible) a night per room. So, again, it’s taking a little bit of time, but as we saw this quarter both of these hotels are absolutely moving in the right direction and produce the cash flow that we were counting on and as we look onto next year both of them are lining up very well.

Your next question comes from the line of Chris Darling with Green Street. Please go ahead.

Thanks, good morning. Brian, can you talk through your expectations for total RevPAR growth this year relative to RevPAR and how that might have changed boost's prior guidance? And then, as you mentioned in your prepared remarks, out-of-room spend and cost reduction supporting results this quarter? Can you help me understand how each of those aspects plays into the updated full-year outlook?

Okay. Let me start. On total RevPAR, it's probably about 40 basis points higher versus where rooms are.

Yes, I think if you look at how we've done through the first part of the year, total RevPAR growth exceeded rooms RevPAR growth in the second quarter. We saw that also in the first quarter. I think the magnitude of the disparity between rooms and total for this year, I think will moderate a bit versus what we saw last year. But as Bryan noted, I think you'll expect that the total RevPAR growth should outpace rooms by about 40 to 50 bits.

And you'll be able to see some of that in our supplemental and remember too that a big piece of that will be the Group side of things and unlike last year where our Group pace was heavy in the first half of the year, this year it's the second half of the year. And so there will be, from a quarter-to-quarter basis, there will be some lumpiness to that.

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

Hi, good morning, guys. Thanks for taking the question. I was hoping we could talk a little bit about Orlando. And I know historically, been a pretty good asset for you guys. And this year, pretty familiar with all the issues impacting the Orlando market. But for your asset there specifically, the renaissance, do you think it's totally a market kind of specific issue or what's your outlook for that asset next year relative to the market? Is there anything you think you need to do? Is it still considered core on a longer-term basis? Thanks.

Yes. Good morning, Chris. Longer-term, we do have a lot of land there. And so there could be some opportunity longer-term to enhance the assets and enhance its value, its leisure offerings, like our other or our past renaissance hotels, it does very well from the Group side. It doesn't do as well on a index basis on the transient side. And so when you look at what -- we've seen happen in D.C., our transient index year to date is in the 130s. Prior to the repositioning, we were in the high 90s and so the branding obviously makes a big impact. From a leisure standpoint, the location kind of in between both parks was next to SeaWorld, of course, but between the two major parks was never a -- made it the primary leisure destination choice. With the New Orlando gate opening -- sorry, the new Universal Gate opening much closer to the hotel that should help going forward too. So I think what we can do is we can look in, especially when the new gate opens and see where that -- if there's additional demand shifting to our area, we definitely have the space to enhance the leisure amenities at the hotel. Looking at the Group side, the bread and butter of this hotel has always been Group. It's been our space and the abundance of space, including the atrium area, which we use really well. And so that will always be appealing to Group’s because we can give them more space per guest or per guest room than some of the other competitors can or give them control of the house when in maybe one of the larger resorts, they're going to be Group one, two or three in-house at any time.

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

Hi, thanks for taking my question. Bryan, maybe if you could talk a little bit about the transaction markets and also about potential rather if -- cause what we're hearing is that larger hotels are harder to transact in the current environments. Would you consider putting mortgage debt on one of your bigger assets like for example, the Hilton San Diego and using some of that capital to buy either another hotel or fund more share repurchases?

Okay. Good afternoon, Floris. From a capital standpoint, I don't know if we would need to put a mortgage on a hotel. We have a fully undrawn $500 million line. We have cash on the balance sheet. We have a low levered balance sheet. So as far as access to capital, whether we wanted to acquire something, whether it be an asset or stock, I think we have all the flexibility and firepower that we need to do that. As far as the transaction market goes, when we sold Boston last year and started looking for acquisition targets, our expectation were things were going to improve this year and while the CM -- part of it was that the CMBS market would improve and that would improve the pace of transactions. The CMBS market has definitely improved. It seems like it's improved in mainly facilitating refinancings more than a lot of purchases. And as rates come down and the cost of that debt comes down, then maybe we see some more private buyers become more active. But up until this point, it really -- I would say we're disappointed with the pace because we thought that there would be better opportunities to deploy the remaining proceeds from Boston Park Plaza. Now, we did deploy a good portion of it in San Antonio and we are very happy with that transaction. And I think if we could find another San Antonio right now, it would be more compelling. That said, we're not seeing a lot of that. We're not -- and to your point, we're seeing some maybe some of the smaller assets. And then when it comes to actually deploying, it's the same thing that we always look at. It's what is -- it's balancing deploying those proceeds into an asset and what are the return expectations of that asset? And then compare that to where are we trading? Where's our stock? And is that a more compelling opportunity? And I think over time, we've shown that we go back and forth between those pretty often and appropriately and we try to remain balanced and that's something is -- we said, we've already had some share repurchase that we announced in the release this morning. And given the lower the stock price goes and the bigger the discrepancy between that and our view of value makes a acquisition that much more difficult because we're going to need to make up for that difference. And so all these things ebb and flow. The good news is, we have the portfolio, we have the balance sheet, we have all the flexibility we need to be able to be very nimble and to be able to go back and forth and make the right capital allocation decision.

And that concludes our question-and-answer session. I will now turn the conference over to Bryan Giglia for closing remarks.

Thank you, everyone, for your time and your interest. And we look forward to seeing many of you in the coming months and we'll look forward to the grand opening of the Andaz in Miami Beach later this year. Thank you.

This concludes today's conference call. Thank you for your participation and you may now disconnect.