Sunstone Hotel Investors, Inc.

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Sunstone Hotel Investors' third 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, November 6, 2020, at 12 p.m. Eastern Time. I will now turn the conference over to Aaron Reyes, Vice President of Corporate Finance and Treasurer. Please go ahead, sir.

Thank you, Ciara, and good morning, everyone. By now, you should have all received a copy of our third quarter earnings release and supplemental, which were made available yesterday. 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, 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 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, Bryan Giglia, Chief Financial Officer, and Mark Hoffman, Chief Operating 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, good afternoon, everybody. Thank you, Aaron. Everybody, thank you for sticking through five hotel earnings calls today. We appreciate you joining us here for what I believe to be is the last of the day. As you are aware, we are in unprecedented times and our third quarter results are a clear reminder of the devastation that the global pandemic has caused to the hotel industry. However, I'm pleased to report that we are seeing several signs that the recovery that began in May and June appears to be gaining steam and that we believe better days lie ahead. There are several encouraging factors that give us confidence, including first, we have successfully resumed operations at the majority of our hotels. Second, those hotels that have been open in general have achieved sequential monthly gains in occupancy. Third, transient room reservations have gradually improved over the past few months. And fourth, our group production, which remains well off normal levels, increased on a sequential basis. Today, I will provide more details on each of these topics. I'll then discuss our monthly cash burn rate, which has been further reduced. as well as our significant liquidity position. In closing, I'll provide an update on a few of our 2020 capital projects before I turn it over to Bryan to provide more details on our recent earnings, liquidity, and dividends. So let's talk about our recent operating results, starting with the pace at which our hotels resumed operations. Of our 19 hotels, six were in operations for all of the third quarter. including Ocean's Edge, which opened in early June, and Chicago Embassy Suites that opened July 1st. Six additional hotels resumed operation during the quarter, including our two hotels in New Orleans, the Marriott Boston Long Wharf and the Hyatt Chicago in July, and then the Hilton San Diego Bayfront and the Renaissance DC in mid to late August. Three additional hotels opened in October, including the Bidwell Portland, the Hyatt Regency San Francisco, and the Renaissance Orlando. Finally, we are excited to report that our Waialea Beach Resort opened earlier this week on November 1st. This leaves us today with 16 of our 19 hotels in operation which comprise 88% of our rooms in our portfolio and generated nearly 96% of our 2019 Hotel EBITDA. Despite having a larger subset of our hotels operating during the third quarter, it's important to note that a good portion of our larger and more economically important hotels did not resume operations until the middle of the third quarter or until the fourth quarter. As a result, our third quarter results, while stronger than we had forecasted internally, underperformed portfolios with a higher percentage of rooms and operations. Holding all other variables constant, we expect our portfolio performance to improve in the fourth quarter and beyond now that several of our larger hotels have resumed operations. In the quarter, comparable portfolio revenues were $24 million, and rev par was $17.58, which represents a decline of 91% and 92% respectively compared to the third quarter of last year. For the 12 hotels that were open at least some portion of the third quarter, RevPAR declined by a marginally better 86% and witnessed sequential monthly RevPAR improvement as the quarter progressed. Similarly, the six hotels that were open for the entirety of the third quarter REVPAR declined by a marginally better 80% and also witnessed sequential monthly REVPAR improvement as the quarter progressed. And finally, the four hotels that maintained operations throughout the year witnessed an 81% decline in the third quarter, which equated to a REVPAR of $36 and a marked improvement from the $14 REVPAR witnessed in the second quarter. As presented in our earnings release, our hotels that have resumed operations have generally witnessed sequential monthly rev part gains. While we do not expect every hotel to follow this trend every month, the overall trend has been positive and gives us confidence that operating fundamentals are gradually improving. Despite an impressive two-thirds reduction in our property level expenses, The combination of only $24 million of comparable hotel revenue and approximately $62 million of total property level adjusted operating expenses resulted in property level adjusted EBITDA loss of $37 million. As you would expect, this compares terribly to the results last year, but marks an improvement to the $42 million property level adjusted EBITDA loss witnessed in the second quarter excluding the losses associated with the recently sold Renaissance Baltimore. Similar to our second quarter, the third quarter property level loss was several million dollars better than we had anticipated as we continue to work with our operators to streamline operations, eliminate non-essential services, and reduce property level expenses from the prior year. Again, as more of our larger hotels have resumed operations and generally demonstrated sequential rev part growth, we would expect our property level losses to continue to decline and eventually return to profitability. When we look at the current segmentation, we continue to see the majority of our demand come from leisure, government, and contract business. Leisure demand has been the primary source of business for many of our hotels and has generally remained steady even after Labor Day as people seek travel opportunities away from their homes, particularly on the weekends. Crew business, which has become an increasingly important source of demand in the current environment, increased in the third quarter relative to the second quarter as more airline routes were restored. The limited group business that did materialize in the third quarter was primarily composed of government-related groups such as Armed Forces and Emergency Management. We have also recently witnessed a very small but growing number of business transient rooms as the workforce has started to return to traditional offices and get back out on the road. So let's dig in more to the forward-looking trends for both group and transient business.