Sunstone Hotel Investors, Inc.

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Sunstone Hotel Investors' Third Quarter 2022 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 8, 2022, at 12 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, 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 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 EBIT.RE, adjusted FFO, and property-level adjusted EBIT.RE. We are providing that information as a supplement to information prepared in accordance with generally accepted accounting principles. On today's call, references to our comparable portfolio will mean our 13 hotel portfolio. which includes the confidant Miami Beach, but excludes Montage Healdsburg and Four Seasons Resort Napa Valley. Additional details on our third quarter performance have been provided in our earnings release and supplemental, which are available on our website. With us on the call today are Brian Giglia, Chief Executive Officer, Robert Springer, President and Chief Investment Officer, and Chris Ostapovich, Chief Operating Officer. Brian will start us off with some commentary on our third quarter operations and recent trends. Afterward, Robert will discuss our recent capital investments. And last, I will provide a summary of our current liquidity position, recap our third quarter earnings results, and provide some additional context as to how we are thinking about earnings 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, Erin, and good morning, everyone. We are pleased with our portfolio's performance in the third quarter as robust leisure demand in the final months of the summer transitioned to encouraging signs of increased corporate and group travel as we head into the fall. The quarter represents the strongest relative performance that we have seen since the onset of the pandemic with comparable rooms rev par in September and total rev par for the quarter both coming in above pre-pandemic levels. Once again, our operators were able to aggressively push pricing, which contributed to comparable average daily rate of $288, an 11% increase from last year and a 16% increase as compared to 2019. While we saw meaningful year-over-year rate growth across our portfolio, the greatest increase was at our urban and group-oriented hotels, which grew rates 20% in the quarter as compared to the prior year. San Francisco led the portfolio in rate growth, and we are encouraged by the recent trends we are seeing there, especially with our recently completed rooms renovation. San Francisco also saw a meaningful increase in occupancy as corporate and group customers returned to the market. While the market has a way to go to return to 2019 levels, 69% RevPar growth compared to 2021 is a positive step in the right direction, and we expect that to continue into the fourth quarter. Our resort portfolio once again performed well and managed to further grow rate above what was a very impressive 2021 performance. Our two premier wine country assets continued to season, and they generated a combined third quarter ADR of over $1,500, the highest combined quarterly rates we have seen since our acquisition. Including these two hotels, our total portfolio generated a third quarter rev par of $223, made up of occupancy of 71% at a $312 average daily rate. Non-room revenues came in strong during the quarter, benefiting from increased group business and related banquet spend. In our comparable portfolio, we once again saw significant contribution from food and beverage revenue, which exceeded 2019 levels. Banquet and AV sales per group room was $207 for the comparable portfolio in Q3 compared to $176 in 2019, up 17%. Our outlet spend continues to build, growing sequentially quarter over quarter maintaining the positive trend we've seen all year. The strength in group activity has been encouraging with several of our larger hotels exceeding pre-pandemic levels. Following a strong Q2, Renaissance Orlando had an even better group performance in the third quarter with group room nights 12% higher, rates 13% higher, and catering contribution 11% higher than the same quarter in 2019. Similarly, at Waialea Beach Resort, group business in the third quarter generated a significant premium to 2019 with banquet spend per group room night 31% higher. Hyatt Regency San Francisco, which has been slower to recover than many of our hotels, had more than nine times the group volume in-house compared to last year, accompanied by catering contributions up 76% year over year and 14% higher than in 2019. We also saw meaningful increases in destination and facility fee revenue, a product of increasing occupancy levels and rolling out these programs to more of our hotels. Cancellation fees in Q3 came in consistent with historic pre-pandemic levels, which is a positive indication that our industry is returning to a more normalized pattern of meeting activity. including the out-of-room spend, our total portfolio generated an additional $120 of revenue per available room in the quarter for a total rev par of approximately $343. For the comparable portfolio, total rev par came in at $317 and exceeded 2019 for the first time since the onset of the pandemic, while remaining 13 occupancy points lower than 2019. On the expense side, we continue to navigate the inflationary environment and look for creative ways to reduce costs. We have worked with our operators to optimize menu offerings and review pricing to mitigate rising food costs and beverage costs. Wage growth has moderated somewhat, but remains in line with our expected range of 4% to 5% and our managers have been able to drive efficiencies in certain areas to help offset higher labor costs. Utility costs have been on the rise, and we expect this likely to persist through the winter. This makes our recent energy efficiency investments that much more worthwhile. In Waialea, the first phase of our solar panel installation has saved nearly $500,000 since it was completed last year and we are now in process on the second phase, which will come online in 2023. As you may have seen in our earnings release, we also published our updated ESG report today, which has additional details on some of the other initiatives we are working on to increase our use of renewable energy and decrease our overall energy, water, and waste intensity to not only benefit the environment, but to also reduce costs. Despite cost pressures, our comparable hotel portfolio generated an EBITDA margin of 30.4% during the quarter, which is only 140 basis points below that achieved for the same quarter in 2019, even with 13 points of lower occupancy. If we exclude the two hotels in our portfolio with significant renovation activity in the quarter, our pro forma hotel EBITDA margin was a very strong 34%, which is the same as our 2019 performance. While we are very pleased with our operator's ability to deliver this level of profitability, our focus is increasingly shifting to maximize portfolio EBITDA as hotels return to normalized occupancy levels. Now turning to segmentation. Our comparable portfolio generated 175,000 total group room nights in the quarter, and the group segment comprised roughly 35% of our total demand. The group room nights volume represents approximately 85% of historical amounts with average rates that are 9% higher than the same quarter in 2019. Group production for all current and future periods for our comparable portfolio in Q3 was 173,000 room nights, which is more than we put on the books in Q3 2021 and at 31% higher rates. In terms of transient business, which accounted for roughly 60% of our total room nights in the quarter, comparable rate came in at $317 and was 23% higher than the pre-pandemic levels that we saw in the same quarter of 2019. We are also starting to see business travel materialize at a more regular cadence. At Renaissance Long Beach, there has been a consistent return of business transient travelers with corporate negotiated revenue up 36% to 2019. The hotel is seeing growth coming from government, aerospace, and consulting segments. Additionally, At Hyatt Regency San Francisco, business transient accounts are contributing higher volumes with significant participation from technology accounts leading to corporate negotiated nights at approximately 90% of 2019 levels and up 17% to Q2. Boston Marriott Long Wharf also continues to see an uptick in business travel sequentially as key accounts have returned to the office or have adopted a hybrid model. Based on our third quarter performance and what we saw in October, we remain encouraged about the outlook for the fourth quarter. Recent trends reflect lead volumes hovering just below 2019 levels and strength in short-term booking activity with a higher contribution from corporate group events. Our group pickup in Q3 for the fourth quarter was higher than the typical pickup amount, underscoring the trend that we have seen of groups booking closer in to their events. Group room nights for the fourth quarter are pacing at approximately 81% of pre-pandemic levels at an average rate that is 7% higher than 2019. This would imply that our overall group revenue pace for this time period is down only 13% from the same time in 2019. If we exclude the Renaissance DC, where the guest room portion of the renovation is in full swing, our fourth quarter group revenue pace is down only 7% to 2019. We have seen strong group booking activity in Boston and San Diego continuing into the fourth quarter. These cities benefit from active citywide calendars and market compression, which is translating into pricing strength. Fourth quarter group pace at our Hilton Bayfront is ahead of the same time in 2019. Boston continues to drive results in both transient and group with increased demand from both leisure and corporate travelers. At Boston Park Plaza, fourth quarter group paces outperforming the same time in 2019 in both rate and volume. As I mentioned earlier in my remarks, the San Francisco market is increasingly showing positive trends. In October, our higher regency at the Embarcadero had several sold-out nights. An additional group and business travel is materializing as we move into the fall our rooms renovation is now complete and the finished product is generating great guest feedback. The city remains a desirable long term lodging market and we fully expect that are well located hotel will contribute to our portfolios earnings growth as the market further recovers in the coming quarters. We were fortunate that our Florida hotels sustained little damage from Hurricane Ian. While Miami was not impacted, Oceans Edge and Key West and Renaissance Orlando both experienced some minor wind and water damage, most of which has already been remediated. We expect to incur approximately $600,000 of expenses in the fourth quarter related to the restoration work. We estimate that the storm's impact resulted in approximately $2 million in displaced revenue across September and October, primarily due to cancellations at Ocean's Edge in Orlando leading up to and shortly after the storm. I'd like to thank our hotel teams in Florida who reacted quickly to minimize the effect of the storm on our physical assets and to protect and to accommodate hotel guests. While the strength of the recovery continues to vary across markets and segments, we are seeing positive trends across our portfolio. When we spoke with you last quarter, we provided some guideposts about how we thought our full year occupancy rate and profitability could play out as we moved into the back half of the year. While those expectations remain consistent with our current thinking, Our better-than-expected performance in the third quarter should position us to achieve the higher end of those indicative ranges. Later, Aaron will provide some additional information to help put this into context. During the quarter, we made further investments to creatively mine value in our portfolio, and we also initiated the value-enhancing repositioning of our recently acquired resort in Miami. Robert will share some additional details of our current and planned capital projects, which we believe will provide a combination of near-term cash flow and long-term growth potential for our portfolio. In addition to capital investments, we also completed an additional $20 million of share repurchases since the end of the second quarter. This brings our year-to-date total repurchase activity to $98 million. at an average price of 1067 per share, a meaningful discount to published estimates of NAV. Together with the dividends for Q3 and Q4, we will return over 120 million to our shareholders this year. To sum things up, as we move into the fourth quarter of 2022, we are encouraged by the recent trends we are seeing across our portfolio. Our well-located urban and group-oriented assets, We'll see continued growth in the coming quarters as demand for business travel and corporate events continues to catch up with the already robust leisure demand at our resort properties. Additionally, Sunstone continues to actively allocate capital, investing in our portfolio, recycling sales proceeds into new growth opportunities, and returning capital to our shareholders through share repurchase and dividends. We believe This is a winning formula that will provide long-term value to our owners. And with that, I'll turn it over to Robert to give some additional thoughts on our recent and upcoming capital investments.