Sunstone Hotel Investors Q3 2008 Earnings Call Transcript

Nov.20.08 | About: Sunstone Hotel (SHO)

Sunstone Hotel Investors (NYSE:SHO)

Q3 2008 Earnings Call

November 5, 2008 5:00 pm ET

Executives

Bryan Giglia, VP Corporate Finance

Robert A. Alter, CEO and Executive Chairman

Art Buser, President

Ken Cruse, CFO

Analysts

Jeff Donnelly – Wachovia Securities

David Bow – Robert W. Barrett & Company

Dennis Force – Citibank

Tom Vanderfoot – Argent Funds

Chris Barranca – Deutsche Bank

Operator

Good afternoon ladies and gentlemen and welcome to Sunstone Hotel Investors Third Quarter Conference Call. At this time, all participants are in a listen only mode. Following today’s presentation, instructions will be given for the question and answer session. If anyone needs assistance at any time throughout this conference, please press the star followed by the zero. As a reminder, this conference is being recorded, today, Wednesday, November 5, 2008.

I would like to turn the conference over to Mr. Bryan Giglia, Vice President of Corporate Finance of Sunstone Hotel Investors, please go ahead sir.

Bryan Giglia

Good afternoon everyone and thank you for joining us today. By now you should have all received a copy of our earnings release. If you do not yet have a copy, you can access it on the investor relations tab of our website, at www.sunstonehotels.com. Before we begin this conference I’d 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-Ks and other filings with the SEC which could cause actual results to differ materially from those projected. We caution you to consider those factors in evaluating our forward looking statements.

We also note that this call contains non-gap financial information, including EBITDA, adjusted EBITDA, FFO, adjusted FFO and hotel operating margins. We are providing that information as a supplement to information prepared in accordance with generally accepted accounting principles. Explanations of such non-gap items in reconciliations to net income are contained in the earnings release that we issued earlier today.

With us today are Bob Alter, Executive Chairman and Chief Executive Officer, Art Buser, President, Ken Cruse, Chief Financial Officer. Bob will begin our call today, with an overview of the operating environment. Art will then review the highlights from the quarter. And finally, Ken will discuss our liquidity, capital structure and guidance.

Following the remarks, the team will be available to answer questions. To begin management’s discussion, I’d like to turn the call over to Bob. Bob, please go ahead.

Bob Alter

Good afternoon everyone and thank you for joining us today. During today’s call, we will cover five topics. First I will discuss the current economic environment and its implications for Sunstone’s long term value. Next, Art Buser, our new president will review our third quarter operations, and near term cash maximization tactics. And finally, Ken Cruse will discuss our liquidity position and our guidance for the remainder of the year.

Number one, current operating environment and implications on Sunstone’s value. For the past year, the US and the World have been struggling with a growing financial crisis and declining consumer sentiment, which have led to the global economic downturn we’re currently experiencing. The lodging industry is highly correlated to the overall economy so you might expect we are seeing softening in our business.

During the third quarter, our comparable RevPAR was down 1.3% as compared to last year’s extraordinary level. Not a trivial decline, but certainly not catastrophic. In fact, I would characterize our 78.5% occupancy and $158 average rate as healthy. Our portfolio continues to perform at a very high level. The third quarter, same store RevPAR down just slightly to 2007 peak levels, and year to date we are still up more than 9% as compared to our 2006 levels, which was a very strong year for our industry and our portfolio.

Meanwhile, our stock, which traded above $15 a little over a month ago, and over $30 a little over a year ago, has recently traded below $4 which puts our total equity market cap below the value of our cash on hand, and implies the portfolio valuation of less than $120,000 per (inaudible).

For perspective, we estimate the replacement value per (inaudible) of our properties ranges from $300,000 to $500,000. Now, I cannot tell you exactly how deep or how long the current recession will be. This downturn is the product of a complicated series of largely unpredicted and seemingly unrelated events. Nor can I tell you exactly how far our RevPAR may decline over the next year. We have instructed everyone in our organization to spend less time forecasting and more time focused on filling our hotels at the maximum rate every day.

What I can tell you is this, first, this recession, like all recessions leading up to it will end. Probably within the next 12 to 18 months. In October we saw a 7% decline in RevPAR as compared to last year. This approximates the worst monthly decline we saw during the 1991 downturn, which lasted approximately 13 months. And was followed by a period of unprecedented growth in our industry.

Sunstone is a real estate owner, not an operating company. And recessionary declines in operations have less effect on the long term value of our assets. As ultimately, asset values tend to rise to replacement costs.

One factor that does have an effect on the value of our assets is new supply. As compared to the 1991 downturn, we are seeing meaningful lower, new addition, supply additions. And given the high cost of capital, I would expect supply trends to remain muted for the foreseeable future. This imbalance will improve the value of our assets in the long term.

Second, we are well positioned to weather these challenging times. Earlier this year we sold the Hyatt Regency Century Plaza at a valuation we expect will exceed 20 times the 2009 EBITDA. As we continue to hold a significant portion of the cash proceeds from this sale, our liquidity position is very strong with over $232 million of cash and cash equivalents, including restricted cash in the bank. Our balance sheet is very good, in very good shape with no near term debt maturities. And our portfolio is largely free from the need of major capital renovation.

Finally, large end stocks are leading indicators. They tend to peak well in advance of the peak in operations and they tend to recover very rapidly upon measurable signs of a recovery in operations. Investors today are not making buy or sell decisions based on fundamentals. They are trading on fear. Historically times such as these have represented exceptional stock buying opportunities.

Sunstone has a high quality portfolio, strong liquidity, a solid balance sheet and exceptional management team. By preparing for the current downturn and continuing to focus on maintaining liquidity and conservative balance sheet, we expect not only to comfortably ride out the current recession, but we also (inaudible) to be in a position to capitalize on future opportunities.

Now let me turn over the call to Art Buser to discuss the third quarter and our cash preservation tactics.

Art Buser

Thank you Bob. And thanks everybody for joining us on the call today. Did you all know I joined the team back in July and from day one I’ve truly hit the ground running. Having done a full lap around our properties and about ten deep into the second lap, I can say, with confidence, that buy and large our assets are in great shape. They’re in the market you want to be in long term.

Bob mentioned our balance sheet is strong, with meaningful liquidity and we have the makings of a super bowl team. As the leader of this team, it’s my responsibility to maximize the performance of our hotels, and our people for our shareholders.

Let me first speak to the third quarter results. Even in this challenging environment, our third quarter FFO per share came in just slightly below last year’s level. Year-to-date, our portfolio’s generated over $2 in FFO per share, 2.5% increase over last year. Adjusted EBITDA for the third quarter was $68.5 million, down 10% from last year, and adjusted FFO per share was only down slightly to last year, $0.69.

Third quarter, 2008, total hotel portfolio hotel RevPAR decreased by 2.1%. The 1.1% increase in ADR was partially offset by 260 bases point decline in occupancy. I am disappointed to say that this result was slightly below the low end of our previously stated range, primarily due for greater than expected softening of travel across the board. Specifically weakness in Baltimore, San Diego markets and the impact of Hurricane Ike on our two Houston properties.

Year-to-date, our total RevPAR increased 1.3% over 2007, out performing the US upper upscale trend which is up .5% year-to-date.

Comparable portfolio RevPAR excluding the Renaissance, Baltimore and Orlando, our two non-comparable hotels that experienced material and prolonged business interruption during 2007, decreased 1.3% in line with the US upper upscale performance. Of 23 represented the first quarter were two comparable hotels became to comp against renovated product in 2007.

In addition, to a more normalized year over year comparison, Baltimore was also impacted by the August opening of a new convention focused Hilton Hotel.

Comparing our year over year, third quarter RevPAR performance by region, our California properties were down 6.3% in comparable RevPAR. Total LA, Orange County, area hotels were down 3.6% while our San Diego hotels were down 10.7%. San Diego continues to be a challenging market with the new convention hotel opening in January, we expect this to continue.

In the mid-west region, our Mayo Clinic portfolio in Rochester continues its impressive track record of outperforming the market. 23 RevPAR for this portfolio was up approximately 8%, driven in part by increased demand for our high end hotel, within a hotel, known as the International, that’s (inaudible).

The additional 19 international guest suites are now open, bringing the total number of keys to 44 luxury suites. For the month of October, the International ran 83% at over double the average daily rate of the next highest rated competitor in our market, in the market, which happens to be our Marriott.

Going forward, we may consider the conversion of additional regular rooms to international rooms, as well as other highest and best use conversions within the approximately 1 million square feet of building area comprising (inaudible) property.

The mid-west region itself was down 1.5% last year impacted by weakness in Chicago. The mid-Atlantic region was up 2.9% for the quarter primarily the results in the (inaudible) with Times Square, Boston and Washington, DC. The southern regions RevPAR decline of 7.6% reflects weakness in Atlanta and surrounding submarkets.

Total hotel operating margins for the quarter decreased by 120 basis points, slightly more than we had anticipated. 23 operating margins were negatively impacted approximately 50 basis points by the impact of Hurricane Ike in the Houston market.

Excluding the Houston hotels, our asset management team and managers were able to cut expenses resulting in slight margin deterioration of approximately 70 basis points on a RevPAR decline of 2%.

We continue to benefit from the lowest management fee structure among our public lodging (inaudible). Our management fee expenses including a set of management fees were $7.3 million in the quarter or approximately 3% of gross revenues, which compares very favorably to our lodging (inaudible).

Let me shift gears. Bob had mentioned our focus on cash maximization tactics. And further to that as he said we expect the next 12 to 18 months to be challenging operationally. Accordingly, our focus is on maximizing our retained cash through the following.

First, our biggest expense is operating expenses. $500 million annual. And thus a major focal point for our organization. We will continue to look for ways to drive operational efficiencies.

Second, in light of less acquisition opportunities, we’ve redeployed our acquisitions team in asset management. Third, we’ve minimized our 2009 capX program. Fourth, we’re exploring the liquidation of one or more non-core hotels recognizing it will be a challenge to sell assets in the current market.

Finally we plan to right size our cash distributions to equate to our taxable income. Which we expect to discuss with you during a subsequent call.

With respect to operational efficiencies our asset management team, working with our operating partners, has done an excellent job of streamlining the operations by removing fixed costs from the system. This year, our operators have eliminated 30 management positions from our hotels after successfully redefining each hotel’s staffing level and expense structure.

Although it’s been a long term focus to identify and eliminate unneeded reoccurring costs, the current environment has also prompted us to work with our operators to develop plans designed to cut additional costs from each of our hotels during this phase of the cycle. These plans are generally short term and tactical in nature. But, can be effective in a swaying margin deterioration during the downward phase of the cycle.

In addition to right sizing costs in the hotels, we have also carefully scrutinized our corporate expenditures and have reduced corporate overhead by 8% as compared to budget. With respect to minimizing capital expenditures we’re already reviewing 2009 capX budgets and have already made a number of significant adjustments.

As we recently completed major portfolio-wide renovations, approximately $135 million over the past two years, our assets are generally not in need of major work. At this point, we have not cancelled or delayed projects we believe will generate significant returns.

Our filter for determining this is mostly based on a hotels customer, competition and economy. For example, a hotel in a transient market with no rate integrity has a different capital plan than one in a group market where customers are making purchase decisions, mostly based on product quality for bookings over the next two years.

We believe we’re well positioned to weather this unprecedented and uncertain economic environment. In tough times like this, companies that have a deep operating acumen out perform those who do not. And I am happy we are on the right side of that comparison. Everyday in every market our job is to make sure our teams on the ground have the right resources to effectively sell our hotels. And to take more than their fair share of available business.

We cannot change the world, but we can do better than the hotel next door. That is what we have done, and that is what we intend to do. Our year to date FTR trend is up 2.2% indicating that we are outperforming our comps.

We have a recently renovated high quality portfolio located in many of the top gateway US markets. Markets we expect will continue to out perform the US upper upscale markets. And as I mentioned, we believe we have significant liquidity to weather the current economic turmoil.

Our overall strategy and to use a sports metaphor, we are playing defense by focusing our efforts to maximize our portfolio cash flow. At the same time, we are preparing ourselves to be best position to play often when that time times. With that, I’d like to turn the call over to Ken to take you through our capital structure and liquidity as well as our updated full year guidance. Ken.

Ken Cruse

Thank you Art. Good afternoon everyone, and thank you for joining us today. First, with respect to our capital structure and liquidity. As Bob said, we finished the quarter with approximately $232 million of cash on hand, including restricted cash. This equates to nearly $4.80 of cash per share. Said another way, our cash on hand equates to better than 85% of the closing price of our stock today.

As Art outlined, we are focused on a variety of measures, things that are maximizing our retained cash during these uncertain economic times. As of the end of the quarter our ratio of net debt to total assets, as defined in our unsecured credit facility, was approximately 44%. At the end of the quarter with a fixed charge coverage ratio of 1.93 times.

100% of our $1.7 (inaudible) a set is fixed at an average rate of just 5.5%. This average rate is approximately 200 to 300 basis points below current market rates. The average terms of maturity of our debt is more than seven years, assuming that our 4.6% exchange with senior notes will be put back to us on the first permitted date in January of 2013.

Our closest debt maturity is in December 2010, which is the $81 million mortgage on our Hilton Times Square, the hotel we believe to be worth well in excess of $300 million. Even in today’s market, we do not believe that refinancing this hotel at or above its current debt level will be an issue.

We believe that especially in these challenging times, the liquidity provided by our excess cash and our absence of near term debt maturities are critical advantages.

I’ll spend a minute now on a topic that’s on the minds of many investors, corporate financial covenants. First off, none of our existing debt contains corporate financial covenants. Our $200 million corporate credit facility, which is undrawn, is such a certain financial covenant, including a minimum corporate fixed charge coverage ratio of 1.5 times.

With that (inaudible) we finish the third quarter well above the threshold with a fixed charge coverage ratio of better than 1.9 times. If we were to see a material decline of more than 20% in our corporate EBITDA from the current level, we believe we may not continue to achieve this covenant threshold. This would mean our access to the credit facility may be constrained or eliminated. If that should happen, we do not believe our business plan would be meaningful impacted. We have (inaudible) as I mentioned, and given our strong cash position and lack of near term debt maturities, we have no plans to borrow on the facility for the foreseeable future.

Moreover, we own 11 unencumbered hotels that we believe could be borrowed should the need for additional cash arise at a time when the credit facility may be unavailable.

Moving on to our common equity, during the quarter we continued to return capital to our stockholders through share repurchases. In August, we repurchased three million shares of our common stock for a total investment of $42.1 million. (Inaudible our common shares outstanding by an additional 6% to $48.5 million.

We currently have authorization to repurchase an additional 67.1 million of common stock under the 2008 repurchase program. Any further share repurchases will be dependent on our long term liquidity forecast as well as market and economic conditions.

Moving on to guidance. First in the interest of increasing information slow during these uncertain times, we intend to begin providing intra-quarter updates on the operating performance of our portfolio beginning in mid-December. These updates will be made available to you on our website and it will be submitted to the SEC on form 810.

With respect to guidance as Bob and Art both noted, we are seeing a continued reduction in business trends in our hotels. Accordingly, we have reduced our full year guidance. I also want to point out that the guidance we are providing at this time is based on expected performance of our existing portfolio and does not account for any dispositions, acquisitions, debt repayments or stock repurchases between now and the end of the year.

Full detail of our guidance can be found on our earnings release. I will just walk you through the highlights at this point. For the full year 2008, we now expect total portfolio RevPAR to be down between 1% and 4% compared to the full year 2007. Additionally, for the full year 2008, we expect the adjusted EBITDA to be approximately 275 to 285 million and expect adjusted (inaudible) per share to be approximately $2.58, $2.75.

I’d also like to give you a quick dividend update at this point. As previously noticed, Sunstone will recognize a tax gain in 2008 on the sale of the Hyatt Regency Century Plaza. Internal Revenue Service rules generally require that a (inaudible) add a selection may either pay tax on a capital gains, or distribute such capital gains to its stockholders within 30 days of the end of the calendar year in which the gains occur.

The nomination of our regular income and capital gains is expected to result in a required distribution higher than our prior quarterly dividends of $0.35 per share. In the interest of maximizing our tax position, and flexibility in this uncertain environment, it’s the current intention to structure the fourth quarter dividends as a special part cash and partial stock distribution.

Given the current level of volatility in our operations and the potential that we may get to realize certain offsetting losses in 2008, we’ve elected to delay the announcement of the structure, amount and timing of the fourth quarter dividends until December when we believe we will be able to more accurately estimate out distributable income for 2008.

I’d also like to point out that the level of future quarterly dividends will be determined by our board of directors after considering long term operating projections, expected capital requirements and risks affecting our business. Consistent with past practice, we currently intend to maintain our dividend level at approximately 100% of our taxable income which may result in a reduction in our dividends going forward.

With that, I’d like to wrap up by saying that considering today’s uncertain operating environment, we’re pleased with our performance year to date. We believe we are well positioned to weather the challenging operating environment we now face. And as well we believe our focus on improving our already strong liquidity position will help to facilitate our creational value for our shareholders going forward.

Thank you very much for your time today. And for your continued interest in Sunstone. I will now turn the call back over to Art to wrap up.

Art Buser

Ken thank you. We appreciate your time today, as well as your continued support of Sunstone. I am very proud of what this team has accomplished to date, and look forward to talking to you again in the coming months. Thank you. With that, I’d like to open up the call to questions. Operator please go ahead.

Question-and-Answer Session

Operator

Thank you sir. We will now begin the question and answer session. As a reminder, if you have a question, please press the star, followed by one on your touch tone phone. If you would like to withdraw your question, please press the star, followed by the two. And if you’re using speaker equipment, you will need to life the handset before making your selection.

Our first question is from Jeff Donnelly with Wachovia Securities, please go ahead.

Jeff Donnelly – Wachovia Securities

Good evening guys. You mentioned it obviously in your press release that you continue to pay out 100% of your taxable income. You know, are you able to give us, I’m not sure if you have this handy, what your taxable net income was fully year ’07 and, sorry if I missed it in your remarks, maybe an estimate in 2008?

Ken Cruse

In 2007 our dividend was just about right on our taxable income for the year. So if you look back to our dividend last year that was pretty close to our taxable income. As I mentioned in my remarks, we’re not prepared to give an estimate for 2008 at this time. We’re delaying the announcement of the dividends until December when we’ll have a bit more clarity o on that.

Jeff Donnelly – Wachovia Securities

Are you able, maybe to express it in a different light as you look forward to 2009? Like maybe as a percentage of an SAD payout?

Ken Cruse

When we make our calculations for taxable income, we look at it as equating approximately 90% to 100% of SAD or cash available for distribution.

Jeff Donnelly – Wachovia Securities

That’s helpful. And just one last question, you know, I’m not sure if this is for Art or Bob or both. I don’t expect either of you to give guidance, this is (inaudible) guidance on 2009 or really place stock picker, but you know, you did mention it Bob, I mean hotel stocks tend to move on RevPAR deceleration or declines begin to abate. When, in your opinion, do you believe we get that period? Is it late in 2009, when you begin to see RevPAR declines begin to slow down?

Robert Alter

Jeff, if I knew that, or any of us knew that, we would not be working for a living. Obviously, you know, there’s a lot of, you know, info floating around there that it could be, you know, the end of, end to the third or fourth quarter of ’09, it could be in ’10. You know, generally when the bottom has hit on RevPAR and it starts to show year over year growth, that’s when generally investors get excited and come into the market and they end to come into the market kind of at the end of that, as part of the increase. You know, based on what I think will happen in ’08, I think our comparisons for ’09 should be pretty favorable, just because of how bad ’08 fourth quarter’s going to look. But you know, who knows where the economy goes from here.

Jeff Donnelly – Wachovia Securities

And actually one last question, I guess for you Bob, you know, probably close to, I guess maybe it was eight year ago, I forget when it was. But, you know, we found ourselves in a similar circumstance with Sunstone and you were able to take Sunstone private. You know, you definitely have access to that private equity world. What are you hearing from...

Robert Alter

It was nine years exactly last month, October.

Jeff Donnelly – Wachovia Securities

Not that you’re counting. What do you hear form that world today around how they look at like, I guess either public companies evaluations or real estate, you know, hotel assets and valuations? And when do you think that group gets interested in maybe becoming more active in hotels and real estate?

Robert Alter

Did you read page C14 of the Wall Street Journal today about Blackstone’s timing?

Jeff Donnelly – Wachovia Securities

Yes.

Robert Alter

I would suggest that most of the private equity is sitting on the sidelines for at least a little bit.

Jeff Donnelly – Wachovia Securities

Okay, thanks.

Operator

Thank you sir, our next question comes from the line of David Bow, with Robert W. Barrett & Company, please go ahead.

David Bow – Robert W. Barrett & Company

Hi, Bob, I don’t know what to say about your level of wealth, but I imagine you really enjoy working too. So that’s kind of a funny thought. On the dividend (inaudible), I clearly think that nobody’s going to mind you resetting the dividend in this environment. But I am curious about what your thinking was about the stock dividend given that clearly your shareholders can’t use the stock dividend to pay their taxes. What’s the thought here about the potential solution of that and why you would stock dividend and how much you might you use.

Ken Cruse

Hi David, it’s Ken Cruse. With respect to the stock dividend as Art, Bob and I all emphasized on the call today, our focus is on maximizing our retained cash in this uncertain environment. Certainly over the long term our goal is to distribute out to our shareholders a meaningful cash percentage of our income. But in the near time because we have a non-recurring capital gain this year, we are looking into doing a stock dividend, or partial stock dividend similar to what other (inaudible) have done including the (inaudible). And this would not result in dissolutions to the existing shareholders as it would be split, an optional split for the existing shareholder group only.

It’s as if, David, you handed me one share and I handed you back a share 1.1 shares back. That simply is what happens, it’s not additional shares being issued to the public, it’s just splitting the shares that are being held by the existing shareholder group. So I think it’s a great way for us to retain cash in an environment like this, and as you mentioned very appropriately, most of our shareholders are expecting to see dividends reduced by most of the (inaudible).

David Bow – Robert W. Barrett & Company

Right. The reduction part I think really applies to next year, people are going to have tax bills related to the capital gains. But I definitely hear your point about the stock split. It just seems like then it’s a phantom dividend. It’s really more changing the number of shares that everybody has rather than providing some return.

Robert Alter

Actually you’re earlier comment about the tax portion of it, a significant number of our shareholders are pension funds that are tax exempt. So in that case, they can choose the shares. Those that are tax paying will have an option to choose some portion of their dividend in cash. And so therefore, the taxpayers will likely pick the cash and the non-taxpayers will likely pick the shares.

In terms of it’s a phantom dividend, it’s not a phantom but in fact, you know as Ken explained, the 1.1 of the split aspect of it does solve our taxable distribution requirement without necessarily utilizing what we consider our precious commodity, which is cash.

David Bow – Robert W. Barrett & Company

Yes, the option part is something that was not explicit in the release. It sounded like Ken was sort of leaning that way. Thank you for making that explicit because then suddenly it makes a lot more sense where not everybody’s getting more shares. So you’re getting a value if you take more shares versus, I think what you’re giving up in cash. Would you set some parameters around that? Is that what you’re going to decide and announce in December that you decide that a certain portion is, you can choose on a certain portion? Or within certain guidelines?

Ken Cruse

David, hi, this is Ken again. I apologize for not explaining it more clearly up front. Yes, in December we will announce the parameters. But essentially what we expect to do is make up to 20% of the total value of the dividend available to shareholders who wish to receive up to all cash in a distribution. We will make that amount available in cash. Now again, we will limit the amount of available, of cash available on the total distribution to 20%. So there is a variety of scenarios where you can see that shareholders who elect to receive all cash may not receive all cash. But I think Bob said it pretty well. Generally there are a number of shareholders who would prefer to receive their shares, they’ll elect to receive all shares, because it’s up to their shareholders who would prefer to receive all cash. And they’ll elect to receive all cash.

David Bow – Robert W. Barrett & Company

Okay, and back to the dividend level. Is there a portion of your first three quarters dividends and what would have been the ordinary $0.35 in the fourth quarter, that is in excess of what you’re taxable income has been. And I guess what I’m trying to get at is, we’ve made a calculation of what we think that special dividend requirement of the capital gain distribution requirement could be. But might it be less than that given that you’ve paid in excess of your taxable income to date?

Ken Cruse

David at this point we’re not prepared to talk about our regular taxable income for the year. But I think you’re on a good track there in terms of trying to estimate what we paid out relative to our taxable income. And certainly that will factor into the total amount of the dividend that we pay out in January. As you know, it’s going to change dollar for dollar with changes in our operations. And in this volatile environment we are not prepared today to tell you what our regular taxable income will likely come out at this year.

David Bow – Robert W. Barrett & Company

Thank you, okay. One more and then I’ll click back in for additional ones. You have $43 million of restricted cash. That seems like kind of a lot. I know you’ve had that for a while. But what does that relate to given that you’ve put a lot of capital into your hotels over the last several year?

Ken Cruse

We have a number of different reserves David. As you know most of our debt is secured debt by the hotels. So we have a lot, at any given point in time where we’ll have property tax reserves for example in out hotels. That’s a big number for our portfolio, we pay over $20 million in property taxes. Most of that gets impounded. And you know there are variety of other reserve accounts.

Robert Alter

All of our franchise hotels and our franchises themselves have a (inaudible) reserve requirement, which that money goes into funds that’s restrictive. And then when we go spend capital, we use it out of that fund. But there’s always an amount of money in what we call capX jail, that’s in the restricted numbers.

David Bow – Robert W. Barrett & Company

Right, it’s just, for a (inaudible) reserver it’s a very big number, particularly when presumably you’ve got the get out of jail card when you’ve spent in 2007.

Ken Cruse

Well we’ve spent, we have a billion, almost a billon dollars worth of revenues. Our capX reserves are in the $45 to $50 million a year.

Robert Alter

4%, at 4% and 5% depending on the, you know...

Ken Cruse

About a million per property.

Robert Alter

Right.

David Bow – Robert W. Barrett & Company

Okay. That’s great, thank you.

Robert Alter

Thanks David.

Ken Cruse

Thanks David.

Operator

Thank you sir and our next question comes form the line of Dennis Force of Citibank, please go ahead sir.

Dennis Force – Citibank

Good afternoon. Ken I missed one of the points you were talking about with the $81 million mortgage due at the end of 2010. What is the security on that?

Ken Cruse

That’s the Hilton in Times Square.

Dennis Force – Citibank

Times Square Hilton, okay. And if you were to, for argument sake, refinance that today, what kind of a rate do you think would be available?

Ken Cruse

Okay, I’ll caveat that with this is based on our, you know, the (inaudible) of lenders recently. We haven’t done any secured financing recently. But current indications would be on an asset like that, we could in excess of $100 to $150 million of proceeds that’s well below what we could have gotten a year and a half ago on the assets. And the rate on a mortgage such as this would range from LIBOR plus 300, to LIBOR plus 450.

Dennis Force – Citibank

Okay. Great. And are you talking about it being a floating rate or that being a fixed rate?

Ken Cruse

Those are floating rate terms.

Dennis Force – Citibank

Okay, so...

Ken Cruse

On a fixed rate, generally it is, would be today, 300 to 450 over call it the (inaudible). And the existing rate on that piece of debt is 5 point...

Dennis Force – Citibank

5.92.

Ken Cruse

5.92.

Dennis Force – Citibank

Yeah, so your rate would be, you think LIBOR plus 300 to 400 or on fixed 10 year treasuries, plus...

Ken Cruse

300 to 400.

Dennis Force – Citibank

300 to 400.

Ken Cruse

Yes.

Dennis Force – Citibank

Okay and then you said you had 11 unencumbered hotels. Would you give us the last 12 months cash flow on that?

Ken Cruse

We have not reported that out Dennis. Let us look into maybe providing that in the future.

Dennis Force – Citibank

Okay, good. And then, the $67 million left of share repurchasable, does that sunset at the end of the year?

Ken Cruse

Yes.

Dennis Force – Citibank

So use it or lose it, okay. And then lastly, in the press release, say the company invested 20.9 million in capital projects, is that all capX for the quarter?

Ken Cruse

Yes.

Dennis Force – Citibank

That was total capX okay, great. Thank you very much.

Ken Cruse

Thanks Dennis.

Operator

Thank you sir. Our next question is from the line of Tom Vanderfoot with Argent Funds, please go ahead.

Tom Vanderfoot – Argent Funds

My question has been answered, thanks.

Operator

Thank you sir. And our next question comes from the line of Chris Barranca with Deutsche Bank, please go ahead.

Chris Barranca – Deutsche Bank

You know, you can’t provide ’09 guidance, but how should we think about cost per occupied room and you know, I assume you’re going to remix business a little bit which could impact the rate. I mean how are you guys internally with Sunstone with (inaudible) properties? Is there any way to kind of ballpark targets there?

Robert Alter

Chris I missed the front end part of your question. Was it just basically about how we’re estimating costs, or did it have to do with revenues as well?

Chris Barranca – Deutsche Bank

Well I mean both, I mean, I assume the business is going to be remixed a little bit next year. You might group up a little bit in certain cases, and take a little bit more discount business. And so, you know, how do we think of, how do we think about your overall, I guess, revenue management and then, you know, mix of occupancy RevPAR. Without numbers just kind of directionally and what, you know, how that’s going to impact your cost management strategy.

Robert Alter

I think as you pointed out, it’s probably pretty difficult for us to talk about individual rate strategy or property strategies because it’s really a street corner by street corner, asset by asset. So there’s no real general direction that I can give you that’s applicable universally across our properties.

You know in terms of expense line items that we’ve rebid out, our insurance and so there’s some things we can look in to the future. But in terms of wages and other things, there’s really not a lot of barometers that I can look to. Now everybody is grouping up out there, the question is whether group is really a (inaudible) to a hotel. Sometimes there are, you know there are businesses out there now that actually aren’t down as much, or maybe flat with last year. And so you know, grouping up is a common popular, sometimes useful strategy but not always applicable.

So, sorry, I don’t have a direct answer for that because we’re really going to be getting budgets at some cases, beginning at 2009, certainly at the end of this year. It’s premature for me to do anymore than speculate anymore than I have.

Chris Barranca – Deutsche Bank

Okay, fair enough. Thanks.

Operator

Thank you sir. And our next question comes from the line of David Bow for a follow up.

David Bow – Robert W. Barrett & Company

Hi, sorry about the printer noise in the background, lots of earnings today. I was a little surprised at the coverage language in the press release. It seems like you guys are, or your lawyers, went out of the way to make sure that you discussed what the risk was of the covenants. Is there anything that’s materially changed that’s led you to that additional concern, other than just the fact that stock is down and the market’s down and people are very worried about that?

Art Buser

Hey David, it’s Art Buser. You know having listened to a number of calls and transcripts, it seems every call somebody asks about line of credit, so we just thought the right thing to do was we’re going to be asked about it why not give people full detail on that up front. And that was really the reason behind it.

David Bow – Robert W. Barrett & Company

Well that’s great, we definitely appreciate that level of detail. Ken, in that covenant, among the covenant is a requirement for an unencumbered pool of assets. Is that the 11 hotels, or a subset of the 11 hotels?

Ken Cruse

That is the 11 hotels. There are 10 hotels in that pool, one hotel is not pledged to the facility.

David Bow – Robert W. Barrett & Company

Okay, so you could borrow against the 11, but it sounds like what you’re saying is that’s sort of in lieu of the credit line.

Ken Cruse

That’s correct. That’s correct.

David Bow – Robert W. Barrett & Company

Okay, and finally just a kind of a math thing, in looking at your results relative to your guidance, you were under in comparable RevPAR. You were worse than expected. Worse than expected in margins. But Ken right in the middle of adjusted EBITDA, to me the obvious answer there is that your G&A was less than you expected. Is that right, or was there something else that I missed or something else about the nature of the guidance?

Ken Cruse

David you’re hitting the nail pretty close to on the head. G&A did come in below and as Art mentioned in his comments, G&A has come in year to date down 8% relative to where we were budgeting and forecasting. We also saved some money on our interest expense during the course of the quarter. I’m sorry, we had higher interest income during the course of the quarter which was factored into our EBITDA. And then our laundries also out performed relative to forecast. So a few minor items but they all worked to enhance the EBITDA number during the quarter.

David Bow – Robert W. Barrett & Company

That’s great, well those things count. That’s all I had, thank you very much.

Ken Cruse

Thank you David.

Operator

Thank you. And I saw no further questions in the queue, I would like to hand the call back over to management for any closing remarks.

Art Buser

Again, this is Art Buser, thank you very much for calling in. I look forward to speaking with you next time.

Ken Cruse

Thanks.

Operator

And ladies and gentlemen, this concludes the Sunstone Hotel Investors Third Quarter Conference Call. You may now disconnect. Thank you for using AT&T conferencing.

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