Sunstone Hotel Investors, Inc.

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Sunstone Hotel Investors Second 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, August 4, 2020, at 12 p.m. Eastern Time. I will now turn the presentation over to Mr. Aaron Reyes, Vice President of Corporate Finance and Treasurer. Please go ahead.

Thank you, Roma, and good morning, everyone. By now, you should have all received a copy of our second 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. 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 call may contain non-GAAP financial information, including adjusted EBITDA, adjusted FFO, and Hotel Adjusted EBITDA Margins. We are providing that information as a supplement to information prepared in accordance with generally accepted accounting principles. With us on the call today are John Arrabia, 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.

Good morning everybody and thanks for joining us today. As you are aware, we are in unprecedented times and our second quarter results are nothing short of sobering as the hotel industry and much of our portfolio remain effectively closed with limited revenue in the quarter. But all is not lost. We are pleased to report that we are in the process of resuming operations at many of our hotels Occupancy trends at those hotels that have resumed operations are encouraging. Our estimated cash burn rate is less than we had estimated and should continue to gradually decline. And our low leverage and sizable cash position not only protect us during these challenging times, but allow us to play offense when many others are likely to be focused on shoring up liquidity. Today, I'll first review the progress made towards resuming operations at our hotels and provide some commentary on our operating trends. I'll then discuss revised estimates of our monthly cash burn rate, which has improved from the range provided last quarter, and talk about recent steps taken to enhance our already sizable and enviable liquidity position. In closing, I'll provide an update on a few of our ongoing capital projects before I turn it over to Bryan to provide more details on our recent earnings and David Fowler. So let's talk about our recent operating results, starting with the pace at which our hotels resumed operations. Of our 19 hotels, four have remained in operations for the duration of the pandemic, including the Embassy Suites La Jolla, Renaissance LAX, Renaissance Long Beach and Boston Park Plaza. Six hotels that had suspended operations have recently reopened, including Ocean's Edge in early June and five other hotels in early to mid-July, leaving us today with 10 of our 19 hotels in operation and currently welcoming guests. With only a small subset of our hotels operating, our second quarter revenues were only $10 million, while RevPar and total portfolio revenues declined by 98% and 97% respectively compared to the second quarter of last year. Over the same period, our total property level operating expenses were $54 million, resulting in property level EBITDA loss of $44 million in the second quarter. While perhaps hard to believe, property level loss was several million dollars less than we had anticipated as we were able to work with our operators to streamline operations, eliminate nonessential services, and reduce property level expenses by an unprecedented 73% from the prior year. Like much of the industry, occupancy for our operating hotels during the quarter hit a low in April and gradually improved as the months progressed. For the four hotels that have maintained operations throughout this year, witnessed an average occupancy of 39% in March, declined to a low of just 8% in April, and then gradually increased to 13%, 16%, and they're nearly 23% in May, June and July respectively, despite increased concerns about a recent spike in COVID cases. Similarly, Ocean's Edge, which resumed operations in early June, quickly ramped up to sustained occupancy levels near 50% by mid-June and remained there through early July, but has since witnessed occupancy levels in the mid to high 30% range as a result of the resurgence of COVID cases in Florida. The six hotels that resumed operations in June and July in general achieved occupancy percentage levels in the teens within the first two weeks of opening. For these hotels, this low occupancy level is generally sufficient to reduce but not eliminate the operating losses and cash drag despite the increased cost of enhanced cleaning protocols, and protective measures taken to keep the hotel associates and guests safe. On our last call, we provided an estimate of our monthly cash burn, assuming most hotels had suspended operations and those that were in operations would run very low occupancies, as was the case in the second quarter. Three months ago, we estimated that we would incur property-level cash losses of approximately $18 to $21 million a month and $10 to $11 million a month of corporate expenses Debt Service, Preferred Dividends, and Capital Spend for a total monthly cash burn of $28 to $32 million, which again includes CapEx but does not include extraordinary items. I'm happy to report that as a result of strong expense controls in the past quarter, our estimate of property-level cash burn has been reduced by approximately $4 million a month, resulting in total monthly cash burn of approximately $25 to $28 million, or a 10% decline, which is inclusive of approximately $3 to $5 million of monthly CapEx. Furthermore, as hotels generally resume operations and occupancy slowly increases, our cash burn rate is expected to be reduced further. Assuming that 10 hotels in operations continue to operate at recent levels. Keep in mind that five of these hotels did not open until July. Our property level cash losses would be reduced by roughly $1 to $2 million a month to approximately $12 to $15 million. When combined with our corporate requirements, our total cash burn rate on average is estimated to be between $23 and $27 million, are nearly a 20% decline from our previous range. Again, we would expect this cash burn rate to gradually decline as we methodically resume operations at additional hotels and as occupancy builds, which has been the case over the past couple of months. So let's turn our discussion to group dynamics and what it means for near-term operating fundamentals. As you can imagine, nearly all of our group business canceled in the second quarter. Other than a few government groups, 96% of our second quarter group room nights on the books prior to the onset of the pandemic canceled. For the third quarter, the trend is expected to be virtually the same as 95% of the group business on the books pre-COVID has already canceled. As the pandemic continues, group cancellations for the fourth quarter have increased as well. currently nearly two thirds of our fourth quarter group nights on the books pre-COVID have canceled. We remain hopeful that several of these groups will materialize in the fourth quarter, particularly as we begin to resume operations at a few of our large group hotels, including the Hilton Bayfront next week. However, we believe that group business will not return in scale until there's a greater comfort in traveling and congregating. This means that group business is unlikely to return in a meaningful way until a vaccine and or reliable therapeutics are developed, which will remain hopeful be the case by the end of the year. The silver lining in terms of group business is that our strategy of keeping sales professionals on property and taking care of our customers is paying off. Since March, we booked 86,000 new group rooms for all future months. In addition to the new bookings, we have thus far rebooked 138,000 group room nights that previously canceled or 23% of all canceled group room nights since the start of the pandemic. Furthermore, an additional 61,000 group room nights that have been canceled have expressed their intent to rebook and are at various stages of reworking their group contracts, which would increase our rebook percentage to 32% of total canceled group room nights. Taken together, recently booked groups and definitive or tentative rebook groups represent approximately $70 to $75 million of group rooms revenue and roughly $100 million of total group revenue. We are confident we could not have captured all of this business if we did not keep sales professional on property to work with and take care of our meeting planners and group customers. I'd like to thank all the hardworking management teams and sales professionals that have rebooked this very important future business. For 2021, while our pure group room night pace is down, We have approximately 577,000 group rooms on the books, representing $145 million of group rooms revenue. We have nearly 16% of our 2021 occupancy on the books, which is slightly below our three-year average of approximately 18% at this time of the year. As we continue to rebook canceled room nights, we could cross over into 2021 with significantly more groups on the books than we originally expected. For context, we all knew 2021 was going to be down in terms of group business compared to our initial 2020 expectations. Furthermore, we continue to see relative strength in leisure and government business at certain hotels, including those in Boston, Key West, and Southern California. and while it is still early, we are starting to slowly see the return of business transient travelers at a few of our hotels, albeit starting from a very small base. So where does this leave us in terms of resuming operations at our remaining nine hotels? Well, we are likely to resume operations at two to three more hotels in August, as well as another few hotels in September and October time period. That said, it is important to mention that one or more hotels may not resume operations until later this year due to ongoing government travel restrictions and quarantine rules or ill-conceived cleaning mandates brought on by various city councils across the country that not only increase operating costs and therefore delay the resumption of operations, but more importantly, increased health risks to both hotel associates and guests alike. Assuming we open hotels on this general timeline and meet our estimated occupancy thresholds, we will likely reduce our monthly cash burn rate even further. So let's switch gears and talk a bit about our significant and enviable liquidity positions. By the end of the quarter, we repaid $250 million of the $300 million line draw that we completed back in late March out of an abundance of caution. In July, we increased our liquidity through the previously disclosed sale of the Baltimore Renaissance. Excluding the $50 million of remaining line balance at the end of the quarter and including the net proceeds from the sale of the Baltimore Renaissance, We held approximately $570 million of unrestricted cash at the end of the quarter on a pro forma basis. With low leverage and significant cash balance gives us ample liquidity to weather this storm, even if it lasts for a prolonged period. To meet our commitments and to take advantage of opportunities that we believe will become available in the next several quarters. This is an enviable position and one that is not shared by many others. Now let's talk about our ongoing capital projects. As you are likely to remember, we postponed approximately $35 million of capital projects this year, leaving approximately $40 million of our 2020 budgeted renovations. At the same time, taking a long-term view of our business, we accelerated $6 to $8 million of very disruptive projects that were on hold awaiting a quiet time to be completed. I'm happy to report that our largest project of the year, the repositioning of the Marriott Portland, will be ready to open in September, and the hotel looks fantastic. Furthermore, we have completed, or close to completing, three of the projects that were accelerated, including the atrium flooring at the Renaissance Orlando, the escalators and portico chair at the Renaissance DC, and the addition of 32 beautiful lanai decks at Waialea Beach Resort, which significantly increased the appeal of these oceanfront rooms. The good news is that most of our capital projects were heavily loaded in the first half of the year, and our capital investments are expected to decline to only $18 to $22 million in the second half of the year. To sum things up, we believe the worst is behind us. 10 of our 19 hotels are operating and we expect to open additional hotels in August and September. The hotels that remain open or have resumed operations have witnessed encouraging occupancy trends and are reducing our overall losses and cash burn. And finally, our significant cash on hand before drawing down on our credit facility not only provides us with incredible stability during these uncertain times, but will allow us to fund attractive investments earlier than others who may be more focused on shoring up liquidity. With that, I'll turn it over to Bryan. Bryan, please go ahead.