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Sunstone Hotel Investors, Inc. (NYSE:SHO)

Q3 2010 Earnings Conference Call

November 4, 2010 12:00 PM ET

Executives

Bryan Giglia – SVP, Finance

Art Buser – President and CEO

Ken Cruse – EVP and CFO

Marc Hoffman – EVP and COO

Analysts

David Loeb – Baird

Joe Greff – JPMorgan

Dennis Forst – KeyBanc Capital Markets

Shaun Kelley – Bank of America Merrill Lynch

Ryan Meliker – Morgan Stanley

Chris Woronka – Deutsche Bank

Josh Attie – Citigroup

Operator

Good morning, ladies and gentlemen, and welcome to the Sunstone Hotel Investors Third Quarter Earnings Call. (Operator Instructions)

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

Bryan Giglia

Thank you. Good morning, everyone and thank you for joining us today. By now you should have all received a copy of our earnings release, which was released this morning. If you do not yet have a copy you can access it on the Investor Relations section 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-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 those factors in evaluating our forward-looking statements.

We also note that this call may contain non-GAAP financial information including EBITDA, adjusted EBITDA, FFO, adjusted FFO and hotel EBITDA margins. We are providing that information as a supplement to information prepared in accordance with Generally Accepted Accounting Principles.

With us today are Art Buser, President and Chief Executive Officer; and Ken Cruse, Chief Financial Officer.

To begin today’s call; I’d like to turn the call over to Art. Please go ahead.

Art Buser

Bryan, thanks a lot. Good morning, everybody. Thanks for joining us today. During today’s call, we’ll provide you with a detailed review of the third quarter results as well as emerging demand and operating trends. Finally, Ken will provide additional detail on our credit profile.

Recent finance transactions and certain refinements we’ve recently made to our liquidity and leverage [inaudible]. All RevPAR margin figures I’m going to discuss are pro forma for our 30 hotels portfolio excluding the Royal Palm Miami Beach, which we acquired during the third quarter and which is in the planning stages of a major renovations set to commence during the fourth quarter. Adjusted EBITDA and adjusted FFO per share reflect the operation of the Royal Palm for our period of ownership.

Adjusted EBITDA for the third quarter was $38.9 million and adjusted FFO per share was $0.14. Please refer to our earnings release for a reconciliation of pro forma, adjusted EBITDA and adjusted FFO and FFO per share to income available to common stockholders.

For the third quarter, our total portfolio RevPAR came in slightly higher than previously announced at 3.3% above prior year. Occupancy decreased one point and average daily rate was up 4.8%. Third quarter margins were flat for the last year.

It’s important to note that the third quarter margins were negatively impacted by one-time cost associated with the implementation of Marriott’s Sales Force One, approximately $358,000. Excluding this non-recurring expense, margins for our comparable 30-hotel portfolio would have increased by 25 basis points.

Though Sales Force One implementation charge, Marriott has assured ownership, this represents an investment which will garner a strong long-term return. So far, there had been some growing pains as you’d expect with any major process change. We are watching performance very closely and will verify if we are indeed receiving a return on our investment.

Year-to-date RevPAR through October is up 1.8% to last year. Year-to-date, we continue to see strength from our gateway market hotels.

Let me switch over to regional performance. In terms of regional performance for the third quarter the year-over-year growth in RevPAR for L.A. Orange County and our La Jolla and Del Mar, all grew at the same rate 6.9% year-over-year as compared to the third quarter 2009.

Now, we’ve mentioned volatility in growth trends during prior calls. During the third quarter, we saw such volatility in our West region which was down 7.1% compared to last year. Portland Marriott was up 15% on RevPAR compared to third quarter 2009, but this strong growth was offset by continued weakness in Houston and Park City, both of which were down 10%. We expect continued weakness at our Houston properties into 2011 due to loss of a significant piece of annual government business.

Our Midwest region was up 3.8% to last year driven by double digit growth in Minneapolis and positive ADR growth in Chicago.

Finally, our East region was up 3.5% for the third quarter. Our growth trend, which as we previously indicated was muted by shifts in group business and difficult comps at three of our largest hotels Renaissance D.C., Renaissance Orlando and Renaissance Baltimore. We expect double digit RevPAR at both Orlando and Baltimore and high single digit growth at D.C. during the fourth quarter.

New York City and Boston continued to outperform turning in RevPAR gains of 8.1, 6.1% respectively third quarter. But putting some perspective in excluding our three convention hotels again D.C., Baltimore and Orlando and our two Houston hotels, all of which were negatively impacted by either difficult comps or loss of government contract, our third quarter RevPAR for our portfolio would have been up 6.2% and the margins would have been approximately 90 basis points higher.

Let’s talk a bit about improving business trends and business mix. As expected, October’s results reflected a RevPAR reacceleration as compared to the third quarter results. October RevPAR for our portfolio finished up 5.8% to last year. Our three large convention hotels, again its Renaissance Baltimore, D.C. and Orlando were up 9.1, 11.1 and 35.3 compared to October 2009.

But the combined second half of 2010, we expect RevPAR for our 30-hotel comparable portfolio to increase between 4% and 5% as compared to the second half of 2009. As we and many of our peers have previously mentioned throughout the cycle, we do not expect to see a smooth growth in RevPAR.

As we witness at our three big boxes in the third quarter, there will be quarters where depending on our market concentrations, we will either outperform or underperform the U.S. uppers ARP scale numbers. That said over the cycle we believe our concentrations and gateway markets such as New York; Boston; Philadelphia; Chicago; Washington, D.C.; Orlando and Miami will outperform the U.S. upper ARP scale average.

During the last cycle, these markets produced over 50% of our total EBITDA. 2011 pace is up 5% driven by 3.2% increase in occupancy and a 1.8% increase in ADR.

Our three largest group hotels, our booking rooms in 2011 at rates in excess of 10% higher of what it was on the books in 2010. Although it’s still early to process, feedback from corporate volume negotiations are indicating rate increases from 4% to 8% depending on the market.

Let me talk a bit about Royal Palm. We completed that acquisition October 27th. Today, we’ve announced that the Denihan Hospitality Group will manage the property and we will re-flag it to one of their brands upon completion of the renovation program, which is currently in the planning stages and we expect completion in the late 2012.

For those of you who are not familiar with this asset, Royal Palm is forever real estate in a truly international market. Almost 50% in the occupied rooms in this market are international. South Beach is a destination that commands high rates and is dominated by unique assets. In order to drive the highest possible NOI and maximize the value of our location, we believe that the Royal Palm should be positioned as a high-end or chic hotel focused on a sophisticated traveler that wants to have the South Beach experience without sacrificing comfort service levels.

Throughout our manager selection process, we were focus on aligning ourselves with a world class operator that would work well with our asset management team through all stages of our ownership with this hotel including positioning, design, renovation and operation. Denihan is that world class operator with the institutional expertise to run high-end boutique hotels with exceptional margins.

In the context of the market and the target customer, we believe the benefits of the Denihan Hospitality Group will allow them to outperform a traditional brand. The South Beach is a market that’s dominated by independent hotels. Customers seek out unique properties based on location, amenities, service levels and room type offerings. So, we specifically are at high demand in South Beach.

And while the major brands did offer incentives such as key money in an efforts to cure the management contract on the hotel, this inducement comes with a cost embedded in terms of the management agreement including longer terms and easily achievable extension, reduce the ability to terminate the operator and limited the ability to influence the hotel strategy and cost structure. We ultimately concluded that the major brand alternatives were unlikely to maximize cash flow; it could significantly impair residual value for the Royal Palm.

The comparison on market segment basis shows that independent hotels in the top markets tend to outperform their branded competitors.

Our conclusion in the case of the Royal Palm was that of a boutique brand that will provide for the highest possible rate, an expedited renovation process, a collaborative process regarding the operations of the hotel and highest residual value to the ability to sell possibly unencumbered while limiting the downside to termination provisions.

More importantly, the Royal Palm is as important to Denihan as it is to Sunstone as the hotel will become a flagship property for both of our companies and its success may lead to future opportunities for us to work together. Our interests are completely aligned and Denihan will provide every resource it has to ensure the success of this property.

In addition to our assets management efforts in South Beach, I’d like to take some time to drill down on a few of the operations and as the management initiatives that Marc Hoffman and his group had been focused on.

First of all, driving rate, the continuing to selectively drive rate wherever possible is a key asset management initiative. The third quarter 19 of our hotels achieved and ADR over the prior year. The majority of these rate increases were achieved through mixed shifting business and limiting lower rated discount bookings. We had success with the strategy at Marriott Boston Long Wharf, Renaissance at LAX, Marriott Troy, Marriott Rochester, Kahler Grand Rochester.

For example, Kahler Grand uses methods to increase the rate 16.9% in the third quarter. And as I mentioned on our last business update call, we have also driven meaningful rate gains in Time Square, Minneapolis and Tysons Corner. All of three of these hotels along with our Portland Marriott and Newport Hyatt showed high single digit, double digit RevPAR growth.

Many of our hotels improved their RevPAR index in the third quarter with Renaissance Baltimore, Marriott Rochester and Sheraton Cerritos all gaining more than 5% in market share.

Driving efficiencies, now for two years of intensive focus on driving efficiencies while year-to-date occupancy is up 1.3 points, our productivity initiatives have reduced totaled portfolio man hours. For example, in our Marriott managed portfolio total hotel man hours are down 2.8% year-to-date versus the same period in 2009.

And in terms of some other initiatives, we’ve been upgrading our parking. We’re evaluating and upgrading dated parking equipment with state of the art systems that are maximizing revenue by reducing leakage and increasing garage productivity.

At Renaissance Orlando, where we recently upgraded the system we have seen in over 60% increase in parking profit. We’re planning to install these new systems in four of our hotels Tysons Corner, Quincy, Del Mar, Hilton in Minneapolis.

Looking ahead, beginning this quarter we have resumed quarterly guidance. Our commitment to you, our investors, has been to provide timely accurate information to help you understand and evaluate our company. We believe operations have now stabilized to a point where we are able to provide you with reasonably reliable information for the upcoming quarter. We will continue to supplement quarterly guidance with our intra-quarter business update calls to provide you with real-time updates on how our portfolio is performing each quarter.

For the fourth quarter, we expect RevPAR for our 30-hotel comparable portfolio to increase between 5 and 7%, adjusted EBITDA to be between $38 million and $42 million, adjusted FFO per share to be between $0.15 and $0.19.

The fourth quarter guidance presented today does not include the impact of any acquisitions or dispositions with the write off of any deferred financing fees or interest expense related to our recent finance initiatives. While our fourth quarter estimates are slightly below street consensus, let me make it clear that our optimism for the growth potential of our portfolio is as strong as ever.

Let me also direct your attention to page 10 of our earnings release. We’ve gone to great lengths to provide you with our pro forma adjusted EBITDA, adjusted FFO and adjusted FFO per share for our year-to-date numbers through September. These numbers reflect our 30-hotel pro forma as if all acquisitions and feedbacks occurred on January 1st, 2010. It also includes our ownership period at the Royal Palm during the third quarter. We expect the Royal Palm to produce approximately $3 million of net income in 2010.

And with that, let me turn the call over to Ken to review liquidity and [inaudible] initiatives.

Ken Cruse

Thanks you, Art and thanks to everyone on the call for joining us today. Today, I will briefly review our credit profile, the three finance transactions we closed this week and I’ll finish by discussing our formal liquidity, coverage and leverage targets.

First with respect to our current credit profile, we ended the quarter with approximately $144 million in cash and cash equivalents, including restricted cash. We hold 12 unencumbered hotels. Our debt maturity schedule is a key strength. Through April of 2015, we now have just $100 million of debt maturities and we have a well-staggered maturity schedule thereafter. And with an average tenure of 7.2 years, the average term to maturity of our debt is the longest in our space.

100% of our interest expenses fix rate with a weighted average cost of debt at just 5.5%. We’ve made good progress on our credit profile year-to-date and as I’ll discuss in a moment, we are committed to continuing to enhance our credit statistics going forward.

Consistent with that goal, my second topic is our recent finance transactions. Earlier this week we closed on three deals. Collectively, these transactions improved our liquidity, extended the average term to maturity of our debt, reduce of our cost of capital and generally, increased our financial flexibility.

The first year deal I’ll discuss is the closing of the deed back of eight hotels to Mass Mutual. This transaction has been in the works for over a year and it was completed on November 1st. The transaction resulted in the elimination of approximately $163 million of near-term debt. The company will record a gain on extinguishment of debt to discontinued operations in the fourth quarter of 2010 and the net assets and liabilities associated with the eight hotels in this portfolio will be removed from our 2010 balance sheet.

A portion of the gain on this transaction will be deferred until all customary contingencies related to the deed back are resolved or expire. This transaction completes our 2009 secure debt restructuring program. Once again we would like to thank Mass Mutual and the co-lenders for their consummate professionalism throughout this process.

The second transaction I have to discuss is the Hilton Time Square refinancing. Also on November 1st, we entered into a new $92.5 million non-recourse mortgage secured by our 460-room Hilton Time Square Hotel. The new mortgage matures in 2020 and bears a fixed interest rate of just 4.97%.

The proceeds from the refinancing were used to repay the previous $81 million mortgage with the balance of the excess proceeds retained for general corporate purposes. Bank of America serves as underwriter for this CMBS transaction.

And the final transaction I have to discuss is our new corporate credit facility, which we also closed on November 1st. Monday was a pretty busy day here. Our $150 million corporate facility bears great interest ranging from 325 to 425 basis points over LIBOR depending on the company’s leverage ratio as expressed in terms of net debt to EBITDA.

The facilities initial term is three years with an option to extend for an additional year. The facility maybe increased to up to $250 million subject to lender approval. The facility is senior in ranking and is secured by guarantees and pledges from certain of our subsidiaries. The facility is not secured by mortgages.

The joint leads of the credit facility are Bank of America and JPMorgan and the co-lender group is comprised of some of our primary banking relationships, Barclays, Morgan Stanley, Citi and UBS.

My final topic today is our formal liquidity, leverage and coverage targets. Liquidity and credit profile are key focus items for Sunstone and accordingly we recently refined our targets to take into consideration the volatility, seasonality and inherent risks associated with our portfolio of lodging assets and our business model as our investment, dividend and total return objectives.

First, with respect to liquidity, we believe it’s appropriate for Sunstone to maintain a cash buffer not including amounts on our credit facility in an amount equivalent to approximately 1/5 to 3/4 of our expected forward 12 months of net fix charges, which we define as capital investments, debt amortization and maturities and preferred dividends. Simply put in the context of our current operation, this equates to target cash balances of between $75 million and $125 million. Based on our ongoing internal risk assessment process, at times we may increase or decrease our target liquidity position.

Second with respect to leverage and coverage, within the next 18 to 24 months, we are targeting corporate leverage defined as net debt to EBITDA of approximately 6.5 times. And we are targeting corporate fixed charge coverage defined as EBITDA less FFO reserves, divided by interest expense, preferred dividends and amortization of approximately 1.6 times.

In addition to continued proactive balance sheet management, we plan to achieve this credit targets through four measures, discipline acquisitions, capital enhancements to our existing portfolio, revenue maximization tactics and by driving operational efficiencies.

To wrap up, while as Art indicated, we are not satisfied with our operating results this quarter, our focus is on continual improvement. As we step back from the details and we think generally about the next several quarters and years, we can’t help to be very optimistic about our future. Industry fundamentals are strong and we are focus on growing our company smartly and continuing to improve our credit and liquidity profile.

While we inevitably encounter bumps in the road as this recovery progresses, our portfolio of high quality, urban, upper upscale hotels coupled with our appropriately levered balance sheet and our proactive disciplined approach to all aspects of our business fuel our optimism for the future.

With that, I’d like to thank you for your time today, and turn the call back over to Art.

Art Buser

Thanks Ken. And let me close out the call by talking a bit about acquisitions and our outlook for 2011. When they handout the Olympic medals for the most volume of hotels bought in 2010, the bronze will be out of our reach. But when it comes to who’s on the podium for some of the smartest and best deals done we believe we’re in the hunt.

We’ve picked our spots and believe each and every one of our deals have exceeded the market terms of value creation. In fact, based on market comps and third-party analysis received in the past month, the four hotels we re-acquired pursuant to our secured debt restructuring program in the Royal Palm are currently estimated to be worth considerably more than our basis. Combined with our internal assessments of our various debt investments, we are conservatively placing the fair value of our year-to-date acquisitions at a level well above our $230 million investment basis.

While we do not expect all of our future investments to result in such significant near-term value creation, we will stay the course and make only disciplined smart investments that we believe are likely to create value. We continue to evaluate investment opportunities in our various stages of the acquisition process and the number of deals. We’re confident that we’ll execute on acquisitions that are added into the portfolio.

In addition to external growth, we continue to evaluate opportunities to invest in our existing portfolio. We believe investing in capital improvements and ROI projects in our existing portfolio represents a lower risk, higher return potential than many acquisition opportunities that we’re seeing. Moreover, as we’re coming out of the cyclical trough, renovations completed in the near term are likely to result in less displacement than would occur if we wait until the recovery matures.

And finally, capital expenditures are currently on sale as both the materials and labor costs are materially below the recent levels. We believe that through a balanced approach of investing in both external and internal growth opportunities we will maximize our return to our investors.

Looking to 2011, while it’s still very early in the budgeting process, several of our hotels are currently projecting double-digit RevPAR increases, while most of our hotels are projecting high-to-mid single digit increases in RevPAR. As we proceed with the 2011 budgeting process, I continue to believe that based on pace and feedback that we’re receiving from volume account negotiations, there is a case in several of our markets for double-digit RevPAR growth in 2011.

So combining our acquisitions track record in 2011, a healthy 2011 outlook coupled with the right capital structure, again as Ken mentioned liquidity and access to credit well in excess of our next five year debt maturities, our debt being fixed at 5.5% averaging nearly seven years in life, having concentrations and outperforming markets like New York, Boston, DC and Rochester combined with increasing operating results, I am optimistic about the hotel industry at large and in particular the prospects for Sunstone and its stockholders.

And with that, I’d like to open up the call to questions. So Luke, please go ahead.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session. (Operator Instructions). Your first question today comes from David Loeb of Baird. Please go ahead.

David Loeb – Baird

Good morning, still morning for me and you. I just have two questions and maybe 27 follow ups, and you guys like that. On the Denihan deal, I really appreciate the color you gave about the residual value and why you think that was an important decision. But can you talk a little bit more about the management contract or other inducements that Denihan may have provided that made this the most attractive alternative?

Art Buser

Yes David, and again I do appreciate the 27 follow ups. As you might appreciate going into detail of management contract terms is something we can’t do, because they typically have a confidentiality provision that prevents us from doing that. I think the adjectives you used, flexible and meaningful termination hurdles are good descriptors of the contract. And it is a phony comparison certainly far superior to what one would get from a traditional brand.

David Loeb – Baird

Okay. So that doesn’t necessarily mean there was capital involved or guarantees or that kind of thing.

Art Buser

Correct.

David Loeb – Baird

Okay. Second question, what’s your view on the acquisition market today? Clearly you may some really good transactions already that have created a lot of value. But do you think there are still opportunities like that out there? And if so what does your pipeline look like?

Art Buser

David, great question. What’s funny is when we did our equity raise over a year-ago in October, the first acquisition’s trip I took the following week was to Miami Beach, and one of our key targets was Royal Palm that we were very focused in trying to acquire and there it happened at the end of August many months later. I’ll tell you by waiting for that transaction to happen the way it did and we paid a little less and had a little less risk involved. So using that as a single case, we continue to look at assets, we continue to get close to assets in terms of biding for them, but we’re going to continue to stay selective in terms of what we close on.

Historically – and as always pick our spots. Historically, deal volume slows down at the end of the year, because nobody wants to be working on deals over the holidays and things change. So we’re seeing a few less deals now than we did in the middle of the year, which was historically a time for things to pick up. Also historically at the ALIS Conference in January is usually a big launch. So I think generically with those granular points made, there’s less deals out there, and I’d expect around ALIS to see a lot more to come.

David Loeb – Baird

What do you think the pricing will look like relative to recent trades when those deals come out of that ALIS?

Art Buser

Hopefully just a high, but I’m hedging my bet. What’s interesting is the brokers assuming that the REITs are the most logical buyers. They’re simply taking assets, putting under the peer groups’ currently multiple audit, and saying that’s the ask. The challenge is if they’re setting sellers expectations at those numbers, yes and Sunstone probably like our peers compares acquisitions to the organic growth in our portfolio. You know, there’ll be a lot of assets that we don’t think will grow at a higher rate than organic – than our portfolio. In addition, we’ve just gone through a period where not a lot assets have had meaningful CapEx spends on them, so all of these transactions are probably going to require a fair bit of CapEx of, one even looks at a accretive multiple, one has to ask how much of CapEx is going to be required to catch them?.

David Loeb – Baird

Okay great. I can be back in for the other 25.

Art Buser

Excellent David. Thanks, I was surprised and pleased to see you as the first caller.

Operator

Your next question comes from Joe Greff of JPMorgan, please go ahead.

Joe Greff – JPMorgan

Hi guys.

Art Buser

Hi Joe.

Joe Greff – JPMorgan

I joined the call a few minutes late, so I don’t know if I’m asking a question that you addressed. But did you give your 2011 CapEx budget for next year or if you didn’t can you provide it?

Art Buser

Yes, Joe we didn’t. I made some mention on the end that we’re looking at it, and here’s why we haven’t given the exact number, we’re still in the planning stages, which projects we’re going to do, and let me give you an example of why we’re fluid on that, hotel like DC where we’re talking about say $30 million to $40 million rooms renovation.

We’re really looking at the convention calendar for 2011, which is going to be a record, and then where the holes are in 2012, we’ll try to figure should it be late in the year, should it all be pushed to 2012. And so with that as an example, we’re hesitant to kind of say the number 2011 is X. And I think in past calls we talked about 70 to even a 150 million of value-add possible CapEx that we continue to evaluate refined scope, look at when to do it. So that was a long of saying, no we didn’t.

Joe Greff – JPMorgan

How do you think about the returns on the basket of things that you’re considering relative to the returns or yields in the acquisition market?

Art Buser

Great question. Generally kind of in the low-to-mid teens in terms of returns and that’s just in the cash depending on the type of renovation it may or not have a residual value clearly carpeting doesn’t, but redoing lobbies and redoing bathrooms and concepting food and beverage as we’re going to be doing it at Longmore certainly do have residual values, but more in the ballpark of kind of mid-teens.

Joe Greff – JPMorgan

And then with respect to the fourth quarter RevPAR guidance, thank you for giving that. How much of that is rate driven?

Art Buser

The majority it is I would say it’s approaching 100%. And so consequently the question you should ask is flow through should be pretty high on that basis.

Joe Greff – JPMorgan

And okay, so let me ask then what’s implied then from a flow through perspective to the hotel EBITDA line item?

Art Buser

Then I don’t know if I would speculate on but – okay, 75% there abouts. It’d be better.

Joe Greff – JPMorgan

Thank you guys.

Art Buser

Thanks Joe.

Operator

Your next question comes from Dennis Forst of KeyBanc. Please go ahead.

Dennis Forst – KeyBanc Capital Markets

Yes, good morning. I wanted to see if you have your arms around the amount of money you’re going to spend on the Royal Palm next year, and you gave a very wide range there a minute ago are $70 million to $150 million I assume, that does not include anything for Royal Palm?

Art Buser

Yes Dennis, we’re still working on, I think we’ve talked about in the past that the renovation number could be as high as $35 million.

Dennis Forst – KeyBanc Capital Markets

Say that number again?

Art Buser

$35 million. In terms of timing though, it has a lot to do when do we get done with the review process, Historic Preservation Board. And so while that’s the budget number, how much of that gets put into a ‘011 and ‘012 is still uncertain.

Dennis Forst – KeyBanc Capital Markets

Okay, so $35 million doesn’t sound like a lot to take two years but more of it is in getting approvals and design and things like that?

Art Buser

Well that’s right, listen Miami Beach is a market where one has to be conscious of not only delivering a product that’s good for customers but is sensitive to the historic nature, part of the building as well as our neighbors. So one wants to be methodical and sensitive in that approach as opposed as opposed to just going in and certainly want to be in the next state. So you’re right, it’s little longer than let’s say we’re doing on the rooms renovation at the Embassy Suites Chicago which gets done in four months.

Dennis Forst – KeyBanc Capital Markets

And the picking of Denihan. Can you give us a little bit of your thinking why you chose them. What their experience in this type of a product that gave you confidence that they would be the right party?

Art Buser

Yes, I would love to talk about that because clearly thought about it a great deal. As you might appreciate, there was a lot of interest from a lot of management companies up and coming brands, brands we had never heard of, emerging brands, well-known companies in this. And so we really had a wide selection to look at which was certainly speaks volumes as to the value of the asset and location.

Interestingly we started with over a dozen companies interviewed five or six and the one thing they all talked about was a customer who comes to Miami Beach, whose need is not met. And the way every company regardless of they were independent boutique, high-end kind of edgy standard branded hotel, they describe this customer exactly the same in terms of demographics and what they are looking for in terms of service experience and design experience. And so knowing that is the customer who is going to – in the end has an unmet need in terms of a, or a product that isn’t available in Miami Beach. We then asked ourselves what company is going to best serve that customer.

The other things we looked at that kind of run through a litany of things, Miami Beach is a highly seasonal market where a lot of the NOI happens in the first four months and has such preferred guest programs that the brands have which provide a great base of business all year long and kind of less seasonal markets like let’s say New York City. In Miami Beach, one doesn’t necessarily want the first couple hundred rooms at a under $100 rate to fill the hotel. Also preferred guest programs typically use some of your most valuable real estate to be given away for free and your suites which comprise almost a third of our inventory at this hotel are also given as upgrades.

As we mentioned on the call, 50% of the guests in Miami are typically international. And what impressed us about Denihan was their business intelligence about their customer. They were the only company that came in that could say definitively here is where our customers are coming from. They had the highest percentage of international travelers in their current portfolio compared to anybody else and had a meaningful number of turn away in terms of requests for Miami Beach.

Also what’s important and you’ve talked about the two year timing, being nimble and responsive in a renovation program like this is very important, and a lot of time to just give you an anecdotal story about a brand not to be named. Its took them two months to approve carpeting for a ballroom. We can’t have those kind of delays when there is a $120 million of cash sitting in an asset that we’re waiting to open up. Also New York City is the biggest domestic feeder markets and because Denihan is very well known independent hotel business 50 years, that’s going to add a lot of value as well.

And one thing I kind of look back at is when LaSalle put Kimpton in the four properties in D.C. a number of years ago, when Kimpton was kind of a up and coming company. Now Kimpton has over 50 hotels and I’d arguably say it’s much of a brand as any of them. They really took advantage of a company who is in its growth phase and was very focused on doing every hotel right. We see that in Denihan and I’ll tell you candidly with this last cycle thought us, when you’re one hotel out of the 500 or 1,000 hotel chain and that hotel isn’t doing well, you get a form letter for a company like Denihan every hotel must succeed and I’ll tell you our business has much to do with personal commitment.

And having two years to get this ramped up and Denihan already having international sales offices to help feed and create awareness for this hotel. They really impressed us with that thought. So I know that’s a long answer but there were a just a lot of things about them that trust us and in a way made the choice easier than we thought.

Dennis Forst – KeyBanc Capital Markets

Okay, that’s a great answer. Thank you very much. Had another question. I’ll have to log back in, I forgot my last question. Thank you.

Art Buser

Okay, thank you.

Operator

Your next question comes from Shaun Kelley of Bank of America Merrill Lynch. Please go ahead.

Shaun Kelley – Bank of America Merrill Lynch

Hey good morning guys. Just a quick question on, first of all kind of interesting in terms of – interesting to get your thoughts on the brand you chose and I guess specifically thinking about your strategy with independence kind of going forward. Art, you mentioned besides Kimpton in the past. Could you talk a little bit more about that, how we might about that for future opportunities and, is there I mean a change it all or shift it all in kind of strategy or are you going to look more heavily independence going forward than maybe you have in the past?

Art Buser

I think very consistent with what we’ve done in 2010 along with our – when we did our management contract our PE [ph] earlier this year. The management brand business is really kind of metaphorically, different horses for different courses. And there are different types of hotels in markets where certain companies really outperform and there is others where they don’t. So we’re really going to make those decisions on a situational basis that there is no one company that outperforms for all assets in all cities. It certainly should show that we are open to a variety of different operators and I was going to just simply take the safest, easiest to explain choice and are going to focus on which one we think is going to deliver the highest return.

Shaun Kelley – Bank of America Merrill Lynch

Okay, that’s helpful. And then maybe to switch a little bit, just talk – in the prepared remarks you talked a little bit about kind of your, the driving of rate at some of the different hotels, when you give such specific color. I couldn’t help I noticed that a number of the ones that you talked about is performing best on the ADR side, where Marriott and I was kind of wondering, did you see any brand differentiation in terms of the strategic push there, was it different kind of by operators in some of their hotels?

Art Buser

Yes, it was by brand, it was more kind of market-by-market. And listen, I’ll add anecdotally, on the prepared remarks we pointed out our successes. No there were some times where we pushed rate too hard and lost occupancy and really lost RevPAR and RevPAR index. So it was more to use the too often used phrase, street corner-by-street corner and had less to do with the brand and more to do with the market.

Shaun Kelley – Bank of America Merrill Lynch

Okay, and then just one on the specific market and I apologize if you did give a little bit more color here but I think in Houston you mentioned loss of a specific government contract. Is that – or some government business, is that hotel specific or is Houston suffering from bigger market issues we’ve seen them just really perform on the RevPAR indices for a while? Thanks.

Art Buser

Sure. Of the three things impacting our hotel, loss of that government contract business is the most huge acute of the impact and kind of impacts at submarket. Second is new supply. There is a number of assets that have come into that market that have really diluted it. And then thirdly, with the disruption of what happened in offshore drilling which is a big part of the corporate demand in that market, that really had some impact as well to that submarket. So less of a commentary on Houston and more about the submarket where our two hotels are located.

Shaun Kelley – Bank of America Merrill Lynch

Great, thanks again.

Art Buser

Thanks.

Operator

Your next question comes from the line of Ryan Meliker of Morgan Stanley. Please go ahead.

Ryan Meliker – Morgan Stanley

Hey guys, just a couple of little things here, no mean to push it too far but thinking more about Denihan, I guess two fold, number one, can you tell me a little bit about just the fact that Denihan owns a majority of their properties and this would only be one of the handful that they operate came into play in (inaudible) color on that on the contract, but if that’s factored into their understanding and decision making process. And two, given that Denihan isn’t really known as much for having a big central reservation system, is there a thought for potentially also affiliate the (inaudible) leading hotels in the world and try to boost some of that international exposure. And then on another note, with regard to RevPAR, maybe I misunderstood, I probably misunderstood but did you say October RevPAR was up only 1.8% and if that’s the case, can you give us some color on the confidence to the 5% to 7% for the quarter guidance. Thank you.

Art Buser

Sure, I’ll take them in reverse order. I said the year-to-date through October was 1.84%, October – I referenced in our portfolio finished up 5.8% for the month.

Ryan Meliker – Morgan Stanley

Wonderful, I thought I might have misunderstood that, thanks.

Art Buser

Good, thanks for giving me the opportunity to remember what I said, I always like to be able to do on the calls. Bouncing on the terms of Denihan, the fact we own hotels was an important consideration, I mean when you manage for yourself, the way they approach strategy, the way they approach renovations, they get the time value of money. We don’t have to educate them on what it means to be an owner. Quick answer yes, that was an important differentiation looking at them.

In terms of affiliating the hotel, long-term with the leading hotels, preferred hotels, hotels of distinction something like that. Listen, never say never but what impressed us about Denihan was their properties had a high percentage of international travelers already. So they already have recognition in the key markets that drive Miami, South America, Canada, UK, Germany. So they already have that recognition with a traveler that case the rate that we’re looking for.

So that could be something we look at down the road, but as the strategy there is going to be more about starting with the right rate instead of discounting and filling it. I would see it probably something less lightly. Did I miss any of your questions?

Ryan Meliker – Morgan Stanley

No I think you got it. Thanks a lot.

Art Buser

All right, thank you.

Operator

Your next question comes from Chris Woronka of Deutsche Bank. Please go ahead.

Chris Woronka – Deutsche Bank

Hey good morning guys.

Art Buser

Hi Chris.

Chris Woronka – Deutsche Bank

Can you share with us what – in terms of the group, on the group side, how much business you’ve kind of booked in ‘08 and ‘09 for ‘010 and then how much of that is still here in ‘011 and maybe even looking for ‘012 to get a sense?

Art Buser

So the question is how much of the business we consumed in ‘010 was booked in ‘08, ‘09 and how much of it booked in ‘08, ‘09 for ‘011?

Chris Woronka – Deutsche Bank

Yes, kind of what’s the role off of some of that less valuable business going to be?

Art Buser

Let me have – Marc Hoffman is with us in the room. Let me have Marc comment on that. Marc, can you just do that?

Marc Hoffman

Sure. The reality of it is the only thing left that really actualized in ‘010 or actualized in ‘011 that was booked in ‘08 or ‘07, really only being our three big hotels, Orlando, DC, and Baltimore. And it’s very limited, I mean most likely just in DC, Baltimore is really about an 18 month house, Orlando is a two, 2.5 year house. So we’re getting to the point where most of the stuff in ‘011 will have been booked in late ‘08, mostly ‘09 and ‘010. And the majority of our portfolio then is all booked within really in ‘010 for ‘010 and in ‘010 for ‘011 somewhat.

Chris Woronka – Deutsche Bank

Okay, so just so I understand that – so ‘011 kind of could have a slight drag from business book during ‘09 or late ‘08? Is that, and then you would see a bigger impact, better impact in ‘012?

Marc Hoffman

Yes, no I don’t think there is really any drag in ‘011 from ‘08, I mean most of ‘011 stuff is going to be more recently booked and it won’t be a drag from sort of late bookings. We are seeing our current trends for 2011 have ADR up over 2010, and CRP is increasing.

Chris Woronka – Deutsche Bank

Okay, that’s helpful. And the Art, and I apologize if I missed some commentary on earlier, but in terms of if you look at a few hotels that you might want to sell on a longer term basis. So I mean do you think the market – is this the market you’re willing to test and how are you guys looking at it, I guess what I am asking is how are you underwriting your expectations for better RevPAR versus the pricing that maybe there now that may not be there in another year or so?

Art Buser

Yes, it’s all about whether pricing wouldn’t be vary, our belief is pricing will be better, hopefully we’re right about that. But we continuously evaluate our portfolio and I think as we’ve demonstrated in the past all the way to the Century Plaza that if we received a compelling offer for an asset that’s above our existing value that we’re likely to act on that. We’ve said we invoke a cycle appropriate strategy. So it’s certainly more of a time to be a buyer than a seller. And while there has been a number of trades out there that have made a lot of people ask the question you’ve asked us hey, with prices like that if you’re an buyer you should be a seller.

Most of the buyers are peers, and as you all know REITs typically don’t buy from REITs, so really the buying pool for us is a little bit smaller. So when we look at clearly the – if the question is one of the metrics, how does that compare to our existing multiples, how does a hotel compare to our organic growth rate of our overall portfolio. And so those are kind of the initial screens we look at evaluating sales.

So we would test the market with an asset or two that we think is going to be go an underperformer compared to our portfolio.

Chris Woronka – Deutsche Bank

Okay, great. And just one final one, on the Royal Palm, that’s a market where were sometimes there is some benefit to owning more than one asset. And are you guys willing to – if the right thing was out there, would you take a second property of the market kind of not solely from a synergy standpoint but partially from a synergy standpoint, or was that really entirely one-off?

Art Buser

We would definitely look at other assets in Miami, part of our investment strategy has been to double down in markets and experience some sort of synergy and Miami Beach is no exception to that.

Chris Woronka – Deutsche Bank

Okay, great. Thanks.

Art Buser

Thank you.

Operator

Your next question is a follow-up from Dennis Forst of KeyBanc. Please go ahead.

Dennis Forst – KeyBanc Capital Markets

Yes, I was going to ask about how Miami Beach fits into your strategy of major urban market business travel? This is somewhat far a field to that?

Art Buser

Yes, Dennis its certainly fits into when you look at our investment strategy what we’ve said we were going to focus on outperforming markets and we’ve looked historically in Miami and going forward in terms of the demand generators and our belief is, I think many people believe, it’s going to be an outperforming market. Also what we like about Miami Beach is given the percentage of international travelers that go there, it provides a bit of a hedge to the US economy, that if US economy underperformed international economies, that we would experience an upside without having to be there and it also consistent with our investment strategy plays to our strength, so Marc Hoffman have spent many years there overseeing high-end hotels and redevelopment of hotels.

It’s something we’ve done in the past. So true, when you look at Sunstone and say Sunstone’s existing portfolio is business traveler first, group house second. I don’t think we’ll focus solely on that type of customer more of opportunities that are consistent with where we think we can add value.

Dennis Forst – KeyBanc Capital Markets

Okay, and for Ken, Ken with the deal with Mass Mutual giving back the eight hotels beginning first quarter of 2011, we should no longer have a few lines in the income statement, revenues from operations held for sale, operating expenses held for sale and interest expense from operations held for non-sale disposition. Those lines go away probably.

Art Buser

Yes, life that will get easier when you do the analysis. As we mentioned on the call, we do have a pro forma analysis in the back of the release. But going forward into 2011, we will remove the assets held for nonsale from our balance sheet.

Dennis Forst – KeyBanc Capital Markets

The last question, I might have missed this, but corporate overhead was $11.5 million in the quarter, real big number, what was included in that?

Art Buser

Yes, this year we have to also run through – corporate overhead are transaction costs. So there’s roughly $6 million of transaction related expenses in the corporate overhead number.

Dennis Forst – KeyBanc Capital Markets

In that quarter?

Art Buser

Yes.

Dennis Forst – KeyBanc Capital Markets

Okay. Were there any transaction costs in the first two quarters or were those more normal?

Art Buser

Less significant.

Dennis Forst – KeyBanc Capital Markets

So – and the $6 million is that all related to Royal Palm or any of it?

Art Buser

A portion is related to another transaction that we looked at during the quarter as well.

Dennis Forst – KeyBanc Capital Markets

Okay. But even though the Royal Palm closed in October, a lot of the transaction costs were included in the third quarter?

Art Buser

Actually Royal Palm closed in in August, so that was included in that quarter. And the reason that you see a big transaction cost number there is because that was bought in the format of a foreclosure auction and so there’s just a number of additional expenses that’ll run through on that type of a transaction versus a typically marketed deal.

Dennis Forst – KeyBanc Capital Markets

Okay. So that number will or the corporate overhead is going to vary going forward depending on the deals you do?

Art Buser

That’s right. But we will add back those items typically for our adjusted EBITDA number.

Dennis Forst – KeyBanc Capital Markets

Okay so I can find it on that schedule, the add back event.

Art Buser

Yes.

Dennis Forst – KeyBanc Capital Markets

Good enough, thank you.

Art Buser

You’re welcome Dennis.

Ken Cruse

Thanks Dennis.

Operator

Your next question comes from Josh Attie of Citigroup. Please go ahead.

Josh Attie – Citigroup

Thank you. Art I think you mentioned in your prepared remarks that you felt the value of Royal Palm has increased since your purchase. I guess first, did I hear that correctly? And if so can you clarify that and talk about yield comps or data that might support that or why do you think that’s the case?

Art Buser

Thanks for asking Josh. Yes, the reason we believe that is not only based on the calls we got after closing on the deal, but more so having put that asset in the line of credit and based on the evaluation process that the value for the asset came back and increased from that perspective had significantly higher than what we paid for. So the two points are evaluation for use in the line of credit and then just inquiries, off market inquiries above the asset.

Josh Attie – Citigroup

Thank you.

Art Buser

Thank you.

Operator

Ladies and gentlemen, this concludes the question-and-answer session. Mr. Buser please go ahead.

Art Buser

Okay, Luke, thanks. We appreciate everybody’s time today, your continued interest in Sunstone. We look forward to speaking to you in January for our fourth quarter inter quarter update. Thanks again.

Operator

Ladies and gentlemen, this concludes the conference call for today. Thank you for your participation and you may now disconnect your line.

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