Sunstone Hotel Investors, Inc.

good morning ladies and gentlemen and thank you for standing by welcome to the sunstone hotel investors third quarter 2023 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 7th at 12 p.m eastern time i will now turn the presentation over to mr aaron reyes chief financial officer Please go ahead.

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 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 commentary on this call will contain non-GAAP financial information, including adjusted EBIT.RE, adjusted FFO, and property level adjusted EBIT.RE. We are providing this information as a supplement to information prepared in accordance with generally accepted accounting principles. Additional details on our quarterly results have been provided in our earnings release and supplemental, which are available on our website. With us on the call today are Brian Giulia, 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, and also provide some additional color on our recent disposition of Boston Park Plaza. Afterward, Robert will discuss our capital investment activity, and finally, I will provide a summary of our current liquidity position, recap our third quarter earnings results, and provide some additional details on our outlook 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, Aaron, and good morning, everyone. We were encouraged by our performance in the third quarter as we managed to deliver earnings that exceeded expectations despite moderating leisure demand and disruption at one of our largest assets following the tragic Maui fires in early August. We have a fantastic team of associates at the Waialea Beach Resort, and we are grateful for their dedication and resilience in recent weeks. Later, we will share some additional details on the fire's impact on our third quarter results and expectations for the remainder of the year. Elsewhere across the portfolio, we continue to see solid attendance at group events and further growth in business transient demand. While softer year-over-year performance at our oceanfront resorts offset some of the urban strength, we worked with our operators to mitigate costs, which, combined with savings in corporate-level expenses, led to EBITDA and FFO above the high end of our guidance ranges. Similar to Q2, growth in the third quarter was the result of robust group business and increased corporate travel. In fact, our urban and convention hotels delivered a very strong 7.4% RevPar growth in the quarter, driven by gains in both occupancy and rate. Washington, D.C. led the portfolio growing RevPar by more than 34% in the quarter as the hotel begins to benefit from our investment to reposition it as a flagship Westin and making it one of the premier convention and transient hotels in the city. The renovated hotel looks great, with fantastic guest rooms and bathrooms, expanded and fully redesigned meeting space, a vibrant modern lobby, and the largest hotel fitness studio in the city. The former renaissance was relaunched at the West End Washington DC downtown last month and will contribute to meaningful growth in the coming quarters as the hotel is now attracting higher quality groups and appealing to a broader set of transient travelers. On the other side of the country, the Hyatt Regency San Francisco continued to rebound in the third quarter growing Rev Park 20% over prior year and capturing incremental share from nearby hotels as well as those in Union Square. We remain encouraged by the hotel's ongoing recovery and expect to see further growth as the hotel capitalizes on its recently renovated rooms and abundant meeting space to create its own group compression and not solely rely on the convention center and citywide events. We also saw strong growth at our hotels in Boston, and Long Beach driven by increased business travel and corporate group events. Consistent with recent trends, operating fundamentals at our resorts continue to normalize as domestic leisure destinations face increased competition from U.S. travelers going abroad without offsetting benefit of inbound foreign visitation. This was most apparent at our Florida coastal hotels which saw further moderation as travelers opted for other destinations and vacation options that had been limited in the last two years. Despite this, our two Florida resorts maintain average room rates that were 45% higher than the third quarter of 2019. While the wine country assets were also impacted by the softer leisure backdrop, they performed better than our other resorts. As we have discussed on prior calls, we have been working with our operators to grow the group base at both of the resorts. We began to see the benefits of those efforts in the third quarter, with each resort growing EBITDA and margin even without the compression from transient demand. In fact, the Four Seasons Napa Valley led the portfolio in total REVPAR growth at 30%, with added contribution of robust out-of-room spend from more group events. As we communicated during the quarter, we were very fortunate that none of the hotel associates at the Waialea Beach Resort were harmed during the fires on Maui and that the hotel did not sustain any physical damage. In the aftermath of the fires, the hotel team partnered with the World Central Kitchen to prepare and distribute more than 8,600 meals to members of the community. In addition, the hotel team has worked diligently to minimize the impact on staff and operations by quickly pivoting to alternate sources of demand in the weeks following the fires. We estimate that the third quarter total portfolio red part growth was negatively impacted by 75 basis points and that EBITDA was 1 million lower as a result of the demand disruption caused by the fires. This is on the low end of our initial estimates and speaks to the quick coordination of the hotel team and the desirability and strength of the market. While we are certainly encouraged by how the Waialea market has performed in recent weeks, the outlook that Aaron will discuss later accounts for some lingering earnings disruption in the fourth quarter that we think is prudent to plan for while we further monitor trends leading up to the high demand festive season. Overall, the disruption from the Maui fires and the continued moderation of leisure demand at our oceanfront resorts offset the growth from our urban and convention hotels and contributed to flat rev par in the third quarter. On an adjusted basis, after factoring in the impact from Waialea, our third quarter rev par growth was just above the midpoint of our guidance range. We were pleased to see that out-of-room spend remained strong and came in above forecast again this quarter, benefiting from continued increases in group activity and increased ancillary revenues. Banquet and AV sales per group room was $222 in Q3, continuing a positive trend which was above 2019 on a comparable basis. Our urban and convention hotels saw strong out-of-room spend with Boston Long Wharf, Renaissance Long Beach, the Westin DC, the Bidwell Marriott Portland, and Hilton San Diego Bayfront all generating spend per group room above third quarters of 2022 and 2019. Including the robust out-of-room spend, our portfolio generated an additional $125 of revenue per available room in the quarter for a total rev par of approximately $348, an increase of 1.3% from last year. As the demand environment evolves, we are working with our operators to drive efficiencies and mitigate costs. Wage growth continues to ease in most markets as more of the excess pressures come out of the labor market. Food and beverage costs also improved relative to prior year driven by a combination of easing inflation, menu optimization, and a higher mix of banquet business. The third quarter also includes the impact of our recent property insurance renewal and the impact of the short-term business mix shift in Waialea following the fires. Despite the various cost pressures, Our total portfolio generated an EBITDA margin of 27% in the third quarter, which was only 140 basis points lower than the same quarter in 2022, even with the headwinds from the disruption in Waialea and the impact of our property insurance renewal, which combined accounted for 90 basis points of lower margin. Now turning to segmentation, our portfolio generated 186,000 total group room nights in the quarter, and the group segment comprised roughly 36% of total demand. Q3 group room night volume represents approximately 90% of comparable pre-pandemic amounts with average rates 13% higher, leading to total comparable group room revenue that was just ahead of the same quarter of 2019. For the total portfolio, group room rates and room nights were each higher by nearly 5% contributing to an 11% increase in year-over-year group room revenue. Group production for all current and future periods in Q3 was 160,000 room nights, resulting in a 3.4% increase in group production relative to last year. Excluding the confidant, which is now under renovation, group pace heading into the fourth quarter is 6% higher than 2022, driven by increases in both room nights and average rates. In terms of transient business, which accounted for 58% of our total room nights in the quarter, comparable rate came in at $299, or 16% higher than the pre-pandemic levels we saw in the same quarter of 2019. For the total portfolio, the transient rate was $319, and was down to the prior year driven by normalizing leisure demand and the shift in the mix of business at Waialea as first responders and other event-driven business came into the market at lower rates than what would typically be generated from leisure guests. Partially offsetting the decline in leisure volume was a 20% increase in revenue from the corporate negotiated channel as business travel continues to grow. We are particularly encouraged by stronger trends at our hotels in Boston, New Orleans, Long Beach, San Francisco, and Portland. Shifting gears to our recent transaction activity, recently we announced the sale of the Boston Park Plaza for $370 million. This disposition is consistent with our lifecycle investment approach and one of the ways we will create value going forward. While Park Plaza has been one of our best performing hotels and it's operating at close to prior peak performance, it was also facing significant upcoming capital needs, which would include meaningful displacement that most likely would not provide the returns necessary to justify the total investment. We acquired the hotel in 2013 and executed our business plan to renovate, and transform the well-located yet undercapitalized hotel, ultimately doubling its cash flow. While the hotel performed well for us, generating $210 million of EBITDA since acquisition, we remained focused on the hotel's future return trajectory. Typically, as hotels get older, a larger percentage of capital investment is defensive as a result of physical or functional obsolescence. At Boston Park Plaza, we were investing millions of dollars each year just in infrastructure and building systems to keep the 100-year-old building in good operating condition. As we look forward to the next renovation, we were increasingly aware that while our initial renovation played to the hotel's strengths, its public spaces including elaborate meeting space, a grand lobby, and an impressive gym, the next renovation we need to address its shortcomings. including the 249 square foot average guest room size and inadequate bathrooms, both of which will be expensive and highly disruptive to earnings. And so it was our view that the amount of capital needed to sustain the current level of earnings was going to be meaningful and the resulting yield on our investment would most likely decrease if we were to continue to own the hotel. So consistent with our strategy to actively recycle capital based on our investment lifecycle approach, we sold the hotel at a strong valuation in an all-cash deal and are actively evaluating opportunities to redeploy proceeds into assets that have a more compelling future return profile. We have sufficient NOLs to offset any gains resulting from the sale, and so we can be thoughtful as we evaluate reinvestment opportunities and not be constrained by the timing limitations associated with a 1031 exchange. In addition, the timing of the disposition aligns well with the seasonal nature of the operations, as the hotel has historically not generated positive earnings from December to February, which gives us time to pursue reinvestment opportunities without the related drag on earnings. Many of you have asked how will we deploy the proceeds. We believe that successfully recycling this capital into a superior growth hotel is pivotal to our ability to add value and finding the right acquisition or a combination of the right acquisition and incremental share repurchase is paramount. We are beginning to see the gap between buyers and sellers converge and we believe that we will be able to identify opportunities that have comparable initial yields, no immediate capital needs, and overall growth that will surpass the all-in investment yield we would have generated with Boston Park Plaza. We have time on our side to make the right capital allocation decision, and we have cash, which in this environment is unique and has already provided us access to direct deals. Let me be clear. At this moment, we are looking to acquire hotels at compelling going-in yields, with limited near-term capital needs and where we can add value, either through asset management initiatives or which present opportunities to unlock value through capital investment later in the course of our ownership. Given the embedded future growth we already have in the portfolio from our deep-turned transformation of the Ondas Miami Beach and the ramping resorts in wine country, a good cash-flowing investment now at the right price will provide diversity to our earnings maintain our strong credit metrics, and still provide us with opportunity to create value. We expect to balance this with incremental share repurchases when our stock price warrants it. To sum things up, it has been a busy few months here at Sunstone as we wrapped up work on one major brand conversion in Washington, DC, started work on two others in Long Beach and Miami, responded to the tragic situation in Maui, and completed a solid execution of the Boston sale. And we did all this while still focused on our day job of driving strong hotel operations, which allow us to deliver earnings ahead of expectations. While the operating and capital markets environment present their own challenges, the entire team remains committed to delivering strong returns and creating value for our shareholders. And with that, I'll turn it over to Robert to give some additional thoughts on our renovation progress and upcoming capital investments. Thanks. As Brian noted, the third quarter was a productive one for us. After a multi-year renovation, we converted the former Renaissance to the Western Washington DC downtown in early October. The transformation has been remarkable. with a fully refreshed hotel that incorporates the Westin brand signature biophilic design elements. We are very pleased with the initial response and the type and volume of bookings the hotel is already attracting. As some of you may have seen in our presentation from September, we finalized the renovation scope for Ondas Miami Beach and the demolition work began last month. In addition to the renovation scope we outlined at the time of acquisition, We have also identified several additional ROI opportunities that we expect will enhance earnings at the resort. We are excited to partner with Jose Andres Group to debut Bizarre Me in Miami Beach. This signature dining concept will not only enhance the luxury experience of the resort, but will also be a destination to attract non-hotel guests to the property and drive additional revenue and earnings for us. Our total repositioning investment is estimated at $70 million. And we continue to expect the hotel will deliver an 8% to 9% yield on our all-in basis in the resort upon stabilization. As we have shared with you before, our business plan at Ondas is very similar to what we did at Wailea Beach Resort, which is to reasonably elevate a well-located resort and position it to benefit from its higher rated luxury neighboring properties. We employed a rational approach to our underwriting, which focused on the pre-pandemic rate environment in Miami Beach. And while leisure travel patterns have been normalizing following tremendous upward momentum in rates coming out of the pandemic, the resulting current rates in the market are still meaningfully ahead of 2019 levels, which gives us increased confidence in our ability to create value at this asset. As I noted earlier, work began last month, which included the demolition of the backyard area. Renovation work on the public spaces and guestrooms will occur in phases during the first three quarters of 2024. We will have additional details to share with you on the specific cadence of the work and its impact on our quarterly earnings as part of our fourth quarter call in February. Elsewhere across the portfolio, work is also underway to convert our Renaissance in Long Beach to a Marriott. The project will be substantially complete by the end of the year with the plan to relaunch the hotel under the Marriott brand in March 2024, which should drive incremental earnings at the hotel. While the transaction market remains challenging, there are deals getting done and recycling capital continues to be a primary component of our strategy. Now that we have harvested the gain from the Boston Park Plaza, we have considerable investment capacity and we look forward to sharing additional information on our progress as we seek to redeploy these proceeds into new growth opportunities. With that, I'll turn it over to Aaron. Please go ahead.