Sunstone Hotel Investors, Inc.

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Sunstone Hotel Investors' first quarter 2020 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, May 8, 2020, at 12 p.m. Eastern Time. I will now turn the presentation over to Aaron Reyes, Vice President of Corporate Finance and Treasurer. Please go ahead.

Thank you, Anna, and good morning, everyone. By now, you should have all received a copy of our first quarter earnings release and supplemental, which were made available earlier today. If you do not yet have a copy, you can access them on our website. 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, 10Qs, 10Ks, 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 column 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 Bryan Giglia, Chief Financial Officer. After our remarks, we will be available to answer your questions. With that, I would like to turn the call over to John. Please go ahead.

Thanks, Aaron. Good morning, everyone. Let me start off by saying I hope you and your families are safe and healthy during this incredible time. And also, we very much appreciate you taking the time out of your busy schedules to get what is a very important update on our company. Much has changed in the three months since our last earnings call as the country, the lodging industry, and our company have had to react to the health risks and economic threats posed by COVID-19. Today, I'll provide an update on the following. First, what has transpired at our company over the last three months? Second, how we reacted quickly in the early weeks of the pandemic to protect our company, to mitigate our damages, and to preserve our already significant liquidity. Third, the current status of our portfolio and the operating environment. And finally, our focus on methodically managing our business to not only protect our company, but to position our company to take advantage of the significant dislocation that is likely to occur. So let's begin with a review of the past three months. Following our earnings call on February 19th, the world generally seemed to be business as usual. We continued to execute on our business plan, pressed forward with ongoing capital projects, worked on additional asset sales, and gradually bought back common stock as our share price declined. In fact, we were quite pleased with our portfolio operating performance as we began 2020. as Hotel EBITDA, with Hotel EBITDA exceeding our budget in both January and February. In early March, right after the Raymond James and City conferences, it became clear that concerns over COVID-19 were increasing, major sporting events, festivals, and conferences were being canceled, and stay-at-home orders and travel restrictions, never before considered a possibility, became increasingly common. By early to mid-March, it became apparent that travel was slowing materially and action was required. We reacted quickly. Working with our operators and in consultation with or at the direction of local health officials, we began the systematic process of temporarily suspending operations at many of our hotels. Between March 12th and April 6th, we suspended operations at 14 of our 20 hotels and in coordination with our property operators, dramatically reduced the service levels and amenities of those hotels that had continued operations in order to mitigate the spread of COVID-19 and to minimize the financial losses. In the early weeks, our focus was squarely on maintaining liquidity and determining how much of our sizable cash balance we would use each month as hotel operations were suspended or significantly curtailed. At that time, we knew that our significant cash position, our low leverage, our well-positioned and recently renovated portfolio and our strong relationships with our capital partners gave us significant confidence that we were among the best positioned to weather this unprecedented storm. It was this confidence that gave us the flexibility to balance our short-term needs for liquidity with our ability to manage and invest in our business in order to maximize our long-term value. With this balanced approach, we did the following. First, as I just mentioned, we suspended operations at 14 of our 20 hotels and materially curtailed operating expenses at those hotels that remained in operations. These steps were very difficult and resulted in a terrible number of layoffs and furloughs. At the same time, working in conjunction with our operators, we decided to maintain various disciplines at our hotels, including the hotel executive teams, engineers, security staff, HR personnel, and sales professionals. We elected to keep these disciplines at our hotels in order to maintain and protect the facilities, to stay in contact with and help displaced associates, and most importantly, to main the hotel's relationships with its customers to sell future business so we could get back to business as soon as practical. While this strategy will result in slightly higher monthly cash burn rate, we believe strongly that it is the right thing to do for our hotels, the hotel associates, and our long-term value. Not all owners have taken this approach, as it is more costly in the short term. We think it's the right long-term decision. Second, we postponed approximately $35 million of capital projects, leaving approximately $40 million of our 2020 budgeted renovations. At the same time, again, with a balanced approach to our business, we accelerated several very disruptive projects that were on hold awaiting a quiet time to be completed. These projects, which add up to roughly $6 to $8 million of total capital investment, will be completed while the hotels have suspended operations, saving us many millions of dollars of operating displacement had we completed the projects when the hotels were fully operational. For example, we are adding lanai decks to many of our ground floor rooms in Waialea, repairing the escalators that connect the lobby to the meeting space at our Renaissance D.C., and putting in a new floor in the atrium at the Renaissance Orlando. Third, we have cut back on corporate expenses. These corporate expense reductions are likely to result in cash savings approximately two to four million dollars this year. Fourth, in the abundance of caution and during the period where we were working to get a better understanding of what our cash burn rate was likely to be, We drew down $300 million on our credit facility. Following that draw, we are working through the process of obtaining covenant relief that will likely be needed on our credit facility, term loans, and private placement notes. There can be no assurances that we will reach agreement with these capital partners. We believe that we are in the later stages of the process of obtaining a covenant relief package which is expected to provide access to the facility funds while providing us flexibility to manage our business without some of the financial limitations that those who may be more highly levered are likely to encounter. And finally, as a result of our discussions with our unsecured lenders, we proactively decided to temporarily suspend our common dividend payments and share repurchase activity. We view this as a small price to pay in the short term in return for the added stability to the company and the flexibility we expect to receive from our debt capital partners. So where does that leave us? Well, in the current environment, with most hotels closed or virtually no revenues, we expect to incur property-level cash losses of approximately $18 to $21 million a month. In addition, we expect to incur on average $10 to $11 million a month in corporate expenses, debt service, and other expenses, which includes approximately $3 to $5 million of monthly capital investments and approximately $1 million a month of preferred stock dividends. When combined, we estimate our all-in cash burn rate to be approximately $28 to $32 million a month on average. We would expect this cash burn rate to gradually decline as we methodically reopen hotels and as occupancy and cash flow build. At the end of the quarter, we had approximately $547 million of unrestricted cash, excluding the previously announced $300 million line draw on our $500 million credit facility. Again, excluding the previously announced $300 million line draw on our facility. Taken to an extreme, we estimate that our significant cash position and access to our sizable credit facility could sustain the current limited to no revenue environment for roughly two and a half to three years if required. Furthermore, if the situation became worse, we could make incremental cuts to our capital spend, corporate expenses, and in other areas. That said, we don't expect to need anywhere near that amount of financial runway, which will leave us with more capital to go on offense earlier than most. As all of you know, we have taken a conservative approach to our balance sheet based on our fundamental view that the significant operating leverage of hotel ownership should not be compounded with high financial leverage. This view has not always been popular nor appreciated. As we have always stated, we have positioned our balance sheet to be able to incur a 50% decline in same-store EBITDA and still have offensive capabilities. While this downturn is worse than we had planned for, our conservative leverage profile gives us the safety to weather a no-revenue environment for an extended period of time while also positioning us to be one of the first companies were able to take advantage of the significant dislocation we expect in the private hotel market. Very few other hotel owners share this enviable position, and we fully expect many hotel owners will be significantly impaired or worse for an extended period of time, particularly if the industry comes out of this pandemic only to deal with recessionary hotel demand and pricing levels. Our balance sheet was built for sizable recessions, Most others were not. So now let's turn our discussion to our portfolio, what we are seeing on the ground, and how we expect to reopen our hotels. As I mentioned earlier, between the middle of March and early April, we suspended operations of 14 of our 20 hotels. The six hotels that remain open include Boston Park Plaza, Renaissance Baltimore, Hilton Times Square, Renaissance LAX, Renaissance Long Beach, and the Embassy Suites La Jolla. A couple of those hotels have secured government business, including housing the National Guard or military business, or military personnel, excuse me, and have recently run daily occupancy levels in the low 20% range. As for group business, we first started witnessing group cancellations around the time of our last earnings call in mid to late February. As I'm sure you're all aware, group cancellations increased meaningfully in March and April and have continued in early May as shelter-in-place orders have been extended and people remain adverse to congregating. Through May 5th, we have received group cancellations that represent approximately 376,000 room nights and $137 million of group revenue, which represents approximately 29% of our 2020 budgeted group revenues. Most of these cancellations are group meetings scheduled for March through June. Approximately 72% of our second quarter budgeted group room nights have canceled and we would anticipate most of our remaining second quarter group rooms will cancel as well. As of March 5th, only 18% and 1% of our budgeted group room nights have canceled for the third and fourth quarters respectively. However, We would expect these figures to continue to increase until there is greater clarity around our ability to congregate and an improvement in the confidence of the traveling public to do so. But not all the news is negative. During the rapidly changing landscape in the month of March, while significant numbers of current year group rooms were being canceled, our hotel sales teams grew our portfolio room nights on the books for $21 million. by 10,000 rooms and added an additional 14,000 room nights for 2022. Our strategy of maintaining several sales professional on property is paying off. In April, in the midst of closing hotels, the hotel sales teams booked new group business, not including any canceled or rebooked events, but true new business for all future years by nearly 23,000 room nights showing that customers are looking to the future. In addition, we have already rebooked or in the process of amending contracts on roughly 15% of the canceled group business and another 25% of the canceled group business has indicated their intent to rebook and are working with the hotel sales professionals. As these groups that have rebooked or intend to rebook compromise our larger events, they equate to nearly 50% of the rooms that have been canceled to date. So what type of business will recover first? When will we reopen hotels? And what are we doing to reopen hotels? Well, we believe drive-to leisure demand is likely to come back fairly quickly as there is mounting evidence that there's significant pent-up demand to travel and to vacation. We also believe that there will be a gradual recovery in commercial transient business as air travel resumes. And finally, we expect a delayed recovery in large group business, particularly if social distancing mandates remain in place for an extended period of time. While we are working daily with our operators to plan for the eventual reopening of our hotels, the truth of the matter is we don't yet know the specific timeline of resuming operations at each one of our hotels. as it stands today, subject to change, we are likely to see a few of our hotels reopen in June with others reopening in July. Recovery is likely to be gradual and hotel operations and service levels will have to change in order to properly address health and safety concerns and the financial reality of what is likely to be low occupancies for some period of time. Our team is working directly with our operators daily to finalize the details related to new openings, cleaning and staffing standards, and the impact on our margins and financials. We will have more details to share with you regarding these modified standards as time goes on. That said, I need to point out that old operating paradigms have been thrown out and all operating models are being reviewed for the future. While this is a challenging process, I believe strongly that long-term, the industry will be better off. Before I turn it over to Bryan, I would like to take a second to thank our operating partners, including all of those at Hilton, Marriott, Hyatt, and our independent operators for their Herculean efforts over the past three months. This is by far the most difficult operating environment our industry has ever faced, and our operating partners and the hotel teams have worked around the clock with fewer resources to handle this challenge as best as possible. I'd also like to thank our hotel executives, not only for their effort in protecting our hotels, but more importantly, for assisting our out-of-work hotel associates, many of whom have worked at our hotels for decades. I also want to thank our team at Sunstone for jumping into action, reacting quickly to this crisis, and putting us in a position not only to weather the storm, but also to come out of this stronger than before. And most importantly, a message to our hotel associates. The heart of our industry, please know that we are doing everything within our power to reopen our hotel safely and as soon as possible So you can come back to work and do what you do best. With that, I'll turn it over to Bryan.