Sunstone Hotel Investors, Inc.

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Sunstone Hotel Investors' first quarter 2023 earnings call. At this time, all participants are in 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 5, 2023, 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 EVA.RE, adjusted FFO, and property level adjusted EVA.RE. We are providing this information as a supplement to information prepared in accordance with generally accepted accounting principles. Additional details on our first quarter results 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 highlights from our first quarter operations and recent trends. Afterward, Robert will discuss our capital investment activity, and finally, I will provide a summary of our current liquidity position, recap our first quarter earnings results, and provide some additional details on our outlook for the second quarter. 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, Aaron, and good morning, everyone. We are pleased with our performance in the first quarter as we continued to deliver on our strategic priorities and achieved operating results that exceeded expectations, including profitability that was above the high end of our guidance ranges. Our portfolio performed well and grew occupancy 16 points from the prior year, with average daily rates up nearly 3%. While the impact of the Omicron variant made for easier comps in January and February, we also saw meaningful occupancy growth in March and are pleased by what we are seeing into April, which continues to point towards sustained demand growth even as we move into cleaner year-over-year comparable periods. What is particularly encouraging is that demand growth continues to diversify away from just leisure travel and is composed of more business transient and group events. In fact, two of our top three highest occupancy hotels in the quarter were the Hilton San Diego Bayfront and Renaissance Orlando, both large convention hotels that were able to replace discounted transient demand with larger amounts of higher-rated corporate group business. The Renaissance Orlando set an all-time monthly revenue and profit record in March, demonstrating the strength of demand for group events and the success of the additional meeting space we added several years ago. Our hotels continue to command strong rates with total portfolio ADR of $314 in the first quarter, a 3% increase from last year, and an 18% increase over 2019 on a comparable basis, which is the highest first quarter ADR the portfolio has ever achieved. Our urban and convention hotels continue to see the biggest gains and grew rates nearly 16% in the quarter as compared to the prior year. The Hyatt Regency San Francisco once again led the portfolio with rates up an impressive 46%, and together with 22 points of occupancy growth, led to year-over-year rev par growth of nearly 120%. But rate growth in the quarter wasn't limited to San Francisco, as New Orleans, Long Beach, San Diego, Boston, and Waialea all drove double-digit gains. Our resort properties generated a combined rate growth of nearly 2% in the first quarter, which is a solid result given the record performance in the prior year. And for the comparable resorts, rates are up an impressive 47% over 2019. The combination of growth in occupancy and rate led to first quarter total portfolio rev par of $219, up 32% from the first quarter of 2022, which was the high end of our guidance range. Non room revenue came in strong during the first quarter, benefiting from continued increases in group activity. Banquet sales per group room was $216 in Q1, up 19% to 2022 and up 18% to 2019 on a comparable basis. Including the out of room spend, portfolio generated an additional $130 of revenue per available room in the quarter for total rev par of approximately $349, an increase of 34% from last year. On the expense side, we continue to navigate the increases in costs we've seen over the last several years and look for ways to reduce expense pressures. While hourly wage growth continues to hover around the high end of historical ranges, we have seen some recent moderation and have been able to drive efficiencies in certain areas to help offset higher labor costs. Food and beverage margins for the total portfolio increased substantially from the prior year, given an improved banquet mix and a higher volume of group events. Food and beverage margins for the comparable portfolio were also 80 basis points higher than 2019, which is a direct result of working with our operators to optimize menu offerings and review pricing to mitigate rising food and beverage costs. Despite cost pressures, our total portfolio generated an EBITDA margin of 26.9% in Q1, which is 330 basis points higher than the first quarter of last year. Excluding our hotel in DC, which is under renovation, The comparable portfolio EBITDA margin was nearly 31.5%, which is consistent with the same quarter in 2019, even with nearly nine points of lower occupancy. As we move further into 2023, our focus continues to be on maximizing portfolio EBITDA as we aim to bring each hotel to its optimal occupancy level. Now turning to segmentation. Our portfolio generated over 222,000 total group room nights in the quarter, and the group segment comprised roughly 46% of total demand. Q1 group room night volume represents approximately 90% of comparable pre-pandemic amounts, with average rates 13% higher, leading to a total group room revenue that was 2% higher than in the same quarter of 2019. Group production for all current and future periods in Q1 was 167,000 room nights, approximately 3% more than what we put on the books in Q1 2022, and at 3% higher rates, leading to a nearly 6% increase in revenue production relative to last year. In terms of transient business, which accounted for roughly 49% of total room nights in the quarter, Comparable rate came in at $327, or 23% higher than the pre-pandemic levels we saw in the same quarter of 2019. As we move further into 2023, we are pleased by the trends we are seeing in transient bookings, particularly with business travel, where our volumes are increasing, but where we still have the most opportunity to grow occupancy across the portfolio. Based on what we have seen so far this year, we remain encouraged about our outlook for 2023. Lead volumes and group production are strong. Group pickup is running higher than historical averages, underscoring the trend that we have seen of groups booking closer into their events. Pace for the remainder of the year is 18% higher than 2022, driven by increases in both room nights and average rates. we believe our portfolio is well-positioned for the remainder of the year with a healthy balance of leisure, group, and business transient demand. Group pace at our two wine country resorts for the rest of the year is up 56% relative to last year and is composed of some very high-quality events which will come with attractive rates and meaningful ancillary spend. Based on seasonal demand patterns for the markets, the resorts will generate the majority of their full-year EBITDA in the second and third quarters. Despite the rainfall that hampered results in the first quarter, it did not stop us from enlarging the lobby bar at Montage Healdsburg, creating a new indoor-outdoor destination with pristine vineyard and mountain views, and expanding Hudson Springs, our poolside restaurant. Based on what we see today, we expect that the 2023 EBITDA contribution from these two resorts should increase meaningfully from last year as they continue to season. The Renaissance DC is in the final stages of its transformation to the Westin DC downtown, which will be completed and rebranded during the fourth quarter. The hotel team has done a fantastic job during the renovation, managing displacement and driving profitability. The hotel has a solid base of group business on the books for the second half of 2023, which will lead to meaningful growth for the second half of the year. In addition to the capital recycling we completed last year and the investments we are making into our portfolio now, we also made further progress on our third strategic priority of returning capital to shareholders. Since the start of the year, we have completed over 20 million of share repurchases which brings our combined total since the start of 2022 to approximately $130 million at a price per share that represents a compelling discount to consensus estimates of NAV and an attractive yield on our earnings. Additionally, we took advantage of some volatility in the interest rate market to swap $175 million of debt in the quarter bringing our split of fixed-rate debt and preferred back in line at nearly 65% of total. Last, we addressed our only 2023 maturity by refinancing the existing $220 million mortgage secured by the Hilton San Diego Bayfront with a new two-year term loan that can be extended for an additional year if we choose. Both transactions strengthen our already healthy balance sheet and further bolster our liquidity position. To sum things up, better than expected performance in the first quarter gives us confidence as we move further into 2023. Our balanced approach to capital allocation in 2022 and 2023 will allow Sunstone to benefit from multiple layers of growth in coming years. We continue to execute on our strategic priorities And while the transaction environment remains challenging, we retain significant investment capacity to deploy when opportunities arise and we will seek to actively allocate capital, investing in our portfolio, recycling sales proceeds into new growth opportunities, and returning capitals 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 will turn it over to Robert to give some additional thoughts on our in-process and upcoming capital investments. Thanks, Brian. We are pleased with the progress we have made investing in our portfolio. Since we last spoke with you earlier in the year, we have completed the addition of the Ola Kino pool at Wailea Beach Resort. This new health and lifestyle-focused experience has been well-received by guests in the initial days since opening, and we expect it to enhance the overall guest experience and increase the appeal and value of the asset. As Brian noted earlier, work is also progressing on the conversion of the Renaissance Washington DC to the Westin brand. The project is expected to be completed in the fourth quarter and will contribute to year-over-year growth in the second half of 2023 as it is relaunched as a flagship Westin property. We are also converting our Renaissance in Long Beach to a Marriott, and that project will be kicking off later this year. We expect the investment to better enable the hotel to compete for business and grow earnings with the Marriott flag driving higher group rate and transient occupancy. The renovation will begin in the second quarter with a plan to relaunch in early 2024. At the Confidant Miami Beach, our renovation plans have now secured approval from the Historic Preservation Board and work will soon begin. We've been able to refine the plans and now expect to incur less displacement in 2023 than we previously expected. We look forward to sharing further updates on our progress as the transformation to the Andaz Miami Beach gets underway. As the year goes on, we will further realize the benefits of our recent investments and conversion activity and start to lay the groundwork for the next layer of growth in the portfolio. Recycling capital will continue to be a primary component of our strategy, as we look to harvest gains and redeploy proceeds into new growth opportunities. The transaction market remains challenging given economic uncertainty and restrictive financing. That said, we maintain considerable balance sheet capacity which allows us to be opportunistic and take advantage of dislocation. Additionally, we constantly look for ways to creatively grow and enhance the value of our portfolio and we look forward to sharing further updates on our investment activity as the year progresses. With that, I'll turn it over to Aaron.