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Sunstone Hotel Investors Inc. (NYSE:SHO)

Q4 2007 Earnings Call

February 22, 2008. 12:00 pm ET

Executives

Steve Goldman - President and CEO

Ken Cruse - CFO

Bryan Giglia - VP of Corporate Finance

Analysts

Patrick Scholes - JPMorgan

David Loeb - Baird

Jeff Donnelly - Wachovia

Michelle Ko - UBS

Smedes Rose - KBW

Chris Woronka - Deutsche Bank

Amanda Bryant - Merrill Lynch

Michael Salinsky - RBC Capital Markets

Dennis Forst - KeyBanc

Operator

Good afternoon ladies and gentlemen, and welcome to the Sunstone Hotel Investors fourth quarter conference call. At this time, all participants are in a listen-only mode. Following today's presentation instructions will be given for the Q&A session (Operator Instructions)

As a reminder this call is being recorded, today, Friday, February 22nd, 2008. I would now 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

Thank you. Good afternoon, everyone, and thank you for joining us today. By now you should have all received a copy of the corresponding earnings release. If you do not yet have a copy you can access it on our website at www.sunstonehotels.com.

Before we begin this conference I would like to remind everyone that this call contains forward-looking statements that are subject to risks and uncertainties, including those contained 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 matters in evaluating our forward-looking statements.

Please also note that this call contains non-GAAP 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-GAAP items and reconciliations to net income are contained in our earnings release that we issued yesterday.

With us today are Steve Goldman, President and Chief Executive Officer, and Ken Cruse, Chief Financial Officer. Steve will go over the highlights in the quarter and provide his thoughts on current market conditions. Ken will discuss our capital structure and credit ratios as well as first quarter and full-year guidance. Following their remarks the team will be available to answer questions.

To begin the management's discussion, I would like to turn the call over to Steve. Steve Please go ahead

Steve Goldman

Thank you, Brian. We’re sitting in California today, so I’ll say good morning to everybody. Welcome to Sunstone Hotel Investors fourth quarter 2007 Earnings Call. We are pleased to report another strong quarter driven by better-than-anticipated demand within our hotels and solid profitability throughout our portfolio.

Consistent with the last two quarters, our strong performance this quarter is largely influenced by the significant capital that has been invested into our portfolio over the past two years. Our recently renovated hotels continue to post strong year-over-year increases. Adjusted EBITDA during the quarter was up 39% to $86 million, and adjusted FFO per share was $0.87, which is a 55% increase over fourth quarter 2006.

Fourth quarter 2007 total hotel portfolio RevPAR increased 12.6%, driven by a 360 basis point increase in occupancy, and a 7.1% increase in ADR. This result is significantly above our guidance of 10% to 11% and compares favorably to total US upper upscale RevPAR, which increased 5.5% in Q4, according to Smith Travel Research.

Comparable portfolio RevPAR, excluding the Hyatt Regency Century Plaza, the Fairmont Newport Beach, the Renaissance Baltimore and the Renaissance Orlando are four non-comparable hotels that experienced material and prolonged business interruption during 2006 to 2007, increased 9.1%, also well above the US upper upscale average.

The California region experienced a 8.6% growth in comparable RevPAR during the quarter. The region posted a 16.3% RevPAR increase including the Hyatt Regency Century Plaza and Fairmont Newport Beach, both of which achieved significant year-over-year RevPAR increases but are excluded from the comparable calculation.

Our Los Angeles and Orange County area hotels experienced a combined 23.4% RevPAR increase over 2006. Excluding the Hyatt Regency and Fairmont, comparable Los Angeles and Orange County RevPAR increased 14.7%.

On the other end of this spectrum, RevPAR for our San Diego hotels increased by just 0.4%, primarily due to the impact of new luxury supply on transient business and weak citywide calendar.

Our Rochester, Minnesota portfolio continue to realize double-digit RevPAR growth highlighted by the International Hotel, a luxury hotel located within the Kahler Grand, which is directly connected to the Mayo Clinic. We continue to see robust demand for this high end product and are converting an additional floor with 21 new luxury rooms. Going forward, we will continue to analyze opportunities to convert additional rooms, as well as other highest and best used conversions within the approximately 1 million square feet of building area we have at this property.

The Middle Atlantic region continue to perform well in the fourth quarter, with a 11% RevPAR increase over 2006. The region was strong across the board including double-digit RevPAR growth in New Your city and Boston, where we saw increases of 12.1% and 13.2% respectively. Comparable operating margins for the quarter increased by 180 basis points, which is above the high end of our guidance range.

Management fee expenses including incentive management fees were $9.1 million in the quarter, approximately 3% of gross revenues, which compares favorably to our lodging REIT peers.

The Hyatt Regency Century Plaza continues to perform better than our initial 2007 expectations. 2007 year ended EBITDA at the hotel was more than three times that of 2006. Operationally the hotel made significant margin improvements in 2007 and we feel that there is still potential for further revenue and expense improvement in 2008.

The Fairmont Newport Beach continues to show marked improvements. We are encouraged with the year-over-year topline improvement and are focused on improving margins in 2008. We recently amended the management agreement at this hotel to better clarify certain definitions related to the calculation of property NOI and total investment, both of which impact the guarantee calculation.

As part of this amendment we agreed to suspend the guarantee payment in 2007, leaving the full $6 million of ROI guarantee funds available for future years. Previous 2007 guidance was based on $2.3 million of guarantee payments in the fourth quarter 2007. In 2008 the guarantee will provide a 9% return, on our invested capital of approximately $100 million and that’s at the net operating income level.

On the acquisitions front we continue to analyze potential deals but at this time believe the pricing of upper upscale assets continues to remain high and we don’t expect to see many transactions that are priced appropriately to our cost of capital and with a growth rate higher than that of our core portfolio.

While we will always be opportunistic and continue to keep our eyes open for new deals, we expect the transaction environment to remain challenging throughout 2008, until the credit market stabilize. Nonetheless we will continue to look to improve the overall quality of our portfolio through targeted assets dispositions on a case by case basis and use the available sales proceeds to pay down debt, acquire our stock or simply reinvest in our portfolio.

Yesterday, we announced that our Board has authorized $115 million of stock repurchases during 2008. This authorization provides us with the opportunity to repurchase shares with potential asset sale proceeds or free cash flow.

With respect to supply trends we expect that the current state of the credit markets will further delay projects that have not come out of the ground. We’ve seen new supply in luxury segment in San Diego, which has impacted our W Hotel and we’ll see new supply increases impact certain of our other markets in 2008, mainly in Baltimore.

In 2008 we will continue to maximize the performance of our portfolio. Marc Hoffman and the asset management team will work closely with both Sunstone Hotel properties and the brand operators to ensure that they are engage in aggressive cost management and focus sales efforts at the hotels to ensure that our recently invested capital is providing superior returns.

We are cautious about the stat of the general economy in 2008 and will continue to closely monitor our portfolio’s performance over the coming months. To-date we have seen some softening in transient demand and some isolated cancellations on the group side. That said 2008 group pace is still up approximately 5% in the brand-managed hotels and nearly 10% in our SHP hotels versus this time last year.

Over the next few months, we will closely monitor the performance and outlook of the general economy, as well as the specific business conditions in our hotels. In the interim, until there is more clarity on where the economy is going and throughout 2008, we will continue to focus on cost management at all of our hotels along with proactive sales efforts, reliable forecasting and operational excellence.

Finally, we intend to remain in constant communication with senior management of the brand management companies, as well as Sunstone Hotel properties, in order to ensure that we can react immediately, should business conditions change.

With that, I'd like to turn the call over to Ken to take you through additional details on our capital structure and credit ratios, as well as the first quarter and full year guidance.

Ken Cruse

Thanks Steve and hi everyone. With respect to our capital structuring and credit ratios, it was the same old story in Q4, we continued to improve. We ended the quarter with $1.7 billion of debt, 100% of which is fixed at an average rate of just 5.5%. The average term of maturity of our debt is nine years.

In December, we continue to pay down our debt balance by repaying a $8.7 million on our mortgage allowance, secured by the Sheraton Cerritos. This had an interest rate of 8.78% and was scheduled to mature in 2009. From a capital need perspective, we believe we are more than adequately insulated against the ongoing credit facilities. We have no debt maturity until 2010 and no near-term need for external financing. We estimate the value of our un-encumbered hotel portfolio, to be approximately $900 million, providing significant access to mortgage capital should the need arise.

Finally, with our $200 million credit facility and a $115.9 of cash and cash equivalents on hand we have a very strong liquidity. As for our credit ratios we ended the quarter with pro forma net debt to EBIDTA of approximately 5.5 times, which is meaningfully better than our 2007 target of 6.0 times.

We also ended the quarter with a pro forma fixed charge coverage ratio of approximately 2.0 times, which is right at our 2007 target level. We expect to see additional improvement in our credit ratios, as our hotels continue to ramp up and as we continue to amortize and opportunistically repay our outstanding debt balances.

We estimate that our common divided payout ratio in 2008 will be less than 70% of our cash available for distribution, which is well below the average for REITs.

A quick accounting update. The FAS B had delayed its rulings on certain proposed changes to the accounting for exchangeable notes. If the proposed changes do ultimately become codified, we may be required to report slightly higher interest expense due to the inclusion of an implied non-cash interest component on the notes.

At this point of time, its unclear if or when a definitive ruling will be issued or become effective but it has, as has been our practice we will find our price revenue update to this accounting policy during future calls

Okay on the guidance. I want to point out that the guidance we're providing at this time is based on expected performance of our existing portfolio without factoring for any potential acquisitions, dispositions, financings or share repurchases, we my ultimately carry out during 2008.

As Steve mentioned our Board had authorized a repurchase of up to $150 million of our common stock. We will continue to evaluate the various alternatives for uses of our excess cash flow from operations and asset sale proceeds. These uses may include repurchasing our common stock, repaying existing debt, acquiring hotels or simply retaining cash.

One of our key goals is to continue to maintain a flexible balance sheet, so that we may take advantage of opportunities as they arise. While our Q1 and full year guidance is based in part on our expectations of slower growth in the US GDP, demand for US lodging tends to highly correlated to the overall US economy. So we do expect any changes in the US economic trends to have a direct effect on our business.

As full detail on our guidance can be found on our earnings release, I’ll just walk you through the highlights at this point.

For the first quarter we expect total RevPAR to increase between 2% and 4% over the first quarter in 2007 and we expect comparable RevPAR to be up 1% to 3% over Q1 2007.

We expect total hotel portfolio operating margins in the first quarter to be down approximately 25 to 75 basis points and comparable hotel portfolio operating margins are expected to be down approximately 50 to 100 basis points, as compared to the first quarter of 2007.

The first quarter will be somewhat pressured by several isolated factors specifically seasonal shift in group business from Q1 to Q3 at our DC Renaissance property and our renovation of the Marriot Boston Long Wharf, which we expect to complete by the end of the quarter.

And with respect to the full year we expect both total and comparable RevPAR to increase between 2% and 5% over full year 2007. We expect both total and comparable hotel portfolio operating margins to range from down 25 basis points to up 50 basis points, as compared to 2007.

And we expect adjusted EBITDA to be approximately $308 million to $323.5 million and adjusted FFO per share to come in between $2.88 and $3.12.

To wrap up my comments, I'd like to say that in spite of our stock price trends we are very proud of our progress and operational performance in 2007. It is of primary importance to us to deliver on our promises, particularly as it relates to our consistent delivery of earnings growth, as outlined in our guidance. While we are guarded in our optimism for 2008, we believe our portfolio of recently renovated, well-located, institutional quality hotels is well positioned to outperform.

With that, I thank you all for your continued interest in Sunstone and now, I'll turn the call back over to Steve to wrap up.

Steve Goldman

Thanks Ken, even in these uncertain economic times, we believe the lodging sector is fundamentally sound and we remain focused on execution and improving our effectiveness at maximizing the value of our assets. As Ken said, we own a geographically diverse portfolio of principally institutional quality, upper upscale hotels.

We've implemented new levels of discipline and accountability throughout the company and we share a cohesive vision for creating long-term value. We will continue to focus on our core competencies, as we drive internal growth, while evaluating acquisition opportunities that will enhance our earnings, thereby allowing us to go long-term shareholder value.

We appreciate your time today, as well as your continued support of Sunstone. I'm very proud of what this team has accomplished in 2007, 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 Instructions) Our first question comes from the line of Patrick Scholes from JPMorgan. Please go ahead.

Patrick Scholes - JPMorgan

Hi, good Morning. In your commentary, you mentioned potential force on asset sales. What sort of pricing multiples are you seeing in the market for assets, similar to your non-core portfolio?

Steve Goldman

It's an interesting question, what we see happening in the market right now, assets of higher quality with higher growth potential and higher barrier markets. It's unclear what the pricing of those assets is and I believe it will remain unclear throughout the year 2008 until the credit markets stabilize and we see some transactions. You almost have the analogy right now of, if you know you live in a nice house and now is not a good time to sell your house, you hold your house.

To specifically answer your question with regard to the non core assets I think it varies on a case by case basis. I think it varies, as to what the potential buyer’s needs are and what their current capital cost situation is. To be more specific, the way we're looking at potential dispositions is not to do an all out marketing of any of our hotels. The way we would approach dispositions is to target certain assets and then find where those assets match best with a potential buyer. You have several buyers out there due to a lot of capital in the market, who are holding a bunch of capital that they're still looking to put out and their looking to put into opportunities where they feel they can do value add.

A lot of the assets that we would sell are assets where there could be some value add opportunities with some additional renovation. So I don’t to hedge the question and not give you a specific Cap rate but I don’t think there is a specific Cap rate right now. I believe that quality assets, while in theory to Cap rates should be moving based on increased cost of capital and less availability of debt and higher cost of debt, we are not seeing a fundamental shift in asset pricing just because of lack of transactions and on some of the smaller assets where you can't finance them through life companies or where you have funds that have raised capital and have lines of credit. I think a lot of that will vary on how those buyers view the asset and they view the upside potential of the assets.

Patrick Scholes - JPMorgan

Okay and follow up to that. When thinking about your non core assets versus your core asset what are more the characteristics of non core versus what you want to continue holding in your portfolio?

Steve Goldman

Yes. I think, the first way to answer the question is here we have 46 assets and we put our assets each quarter into buckets, we rank them from 1 to 46, in terms of their earnings. We rank them from 1 to 46, in term so their earnings per room. We rank them in terms of their margins. But I think it’s a practical matter the chart I like best when we have our quarterly Board meetings is the one that ranks them into A, B, Cs and the way we rank that 15As, 16Bs and 15Cs. And I think no matter the size of the portfolio, I believe, that we will always mark the portfolio to market. We’ll always look at, which is our number one hotel, which is our number last hotel and we’ll always have A, Bs and Cs in appropriate percentages like that.

With regards to the characteristics of assets that we would sell, which is probably largely in the C category because I don’t think we’ve any hotels in the A or B category that we would consider selling under any circumstances right now.

The categories are smaller hotels, more tertiary market and hotels that require some capital. We saw the sold the Sheraton Salt Lake City at the end of 2007 and I think that hotel was a perfect example of a hotel that we would characterize as a disposition hotel. It was not one of our best hotels, it was not in a great market, it was not in a great condition and it required significant capital to maintain the Sheraton franchise and significant capital been approximately $15 million. So when we looked at whether or not we want to own the hotel, we looked at the hotel in today's value and we sold it at about 8.2, 8.3 times '07. We looked at it in today's value at the time, and then we looked at it would we want to own it with another $16 million of investment in it and then the decision here was, a very clear no. So, I think that gives you a little bit of the thinking how we characterize assets that we will put up for disposition.

Patrick Scholes - JPMorgan

Okay, just two more quick questions here, I didn't see your forecast for 2008 CapEx in the press release. So it's my first question and second is what is -- you've historically said five times, that's EBITDA ratio, is your comfort level, is that still the same?

Steve Goldman

The last question is yes, but the first question, with regard to our CapEx. In 2008, we generally expect to spend somewhere between $80 million and $90 million, which includes the Long Wharf innovation. On a ongoing basis, we believe that a true run rate CapEx for any lodging company is probably somewhere realistically 5% to 7% on an annual basis plus individual ROI projects on top of that.

Operator

Thank you. Our next question comes from the line of David Loeb from Baird. Please go ahead.

David Loeb - Baird

Hi, Good Morning, I want to just get a little clarity on the your buyback interest, I appreciate the comments about how you would fund that, either with assets sales or free cash flow but can you just give us a little idea of your appetite for that, it sound like you have no appetite to increase your leverage and decrease your flow-load?

Steve Goldman

Yeah, you know Loeb, David, I think, that's a good question, it is very interesting if you listened to various people give their opinions on stock buybacks. There is a very clear sentiment, which reads that stock buybacks limits the future growth of the company, which I personally agree with and is something that we will always consider.

That said, we think it is always a good idea to have an authorization to repurchase common stock. When evaluating uses of our free cash flow and proceeds from potential asset sales, we'll always consider several different uses of the fund that include paying down debt, include acquiring other assets, includes in investing in our existing portfolio includes simply sitting on the cash, and last includes buying back shares.

And the way I look at the share buyback and why I ask the Board for the authorization to acquire shares, I think like all of the other alternatives that we have for use of our capital, we should have the opportunity to acquire shares because there maybe a moment in time and I don't know how to say this, other than using these words. There maybe a moment in time where the share price of our stock is just kind ridiculous and if that point in time coincides with a window period where we have the availability of acquiring our shares, I like to have the flexibility. And that was really the thought behind going to the Board and asking them for authorization to acquire shares.

David Loeb - Baird

Okay. As a follow-up, do you think that we are now in a time where your share price is ridiculous?

Steve Goldman

That's a great a question. And I think we are in a time right now, where there is uncertainty as to the back-half of the year with regard to the general economy. We are in a time now where we see that retail growth is slowing. We are in a time now, where we see that energy costs are increasing. We are in a time right now, where we see the credit market is still in turmoil. So we’re in a time of somewhat certainty.

That said, I look at the price of our shares, I look at the price of the other REIT shares. I look at the way these companies have traded historically and I think the prices at we trade at today are factoring in a lot of the uncertainty. That said, is there a potential for additional movement plus or minus? I don’t know, I don’t have a crystal ball. I don’t think the prices of the stocks right now are at ridiculous levels but I think we’re starting to get a little bit close.

David Loeb - Baird

One more if you don’t mind. On your dividend that your payout of taxable income was substantial you didn’t have a lot of margin in what you paid out in 2007. Does that suggest that you might have some upward pressure or need to increase the dividend during 2008?

Ken Cruse

Hey David this is Ken I’ll take that one. As a stabilized portfolio our taxable incomes is going to grow at a pretty consistent trend with our FFO per share. We increased our dividend this year by about 10%. So we feel like we have got good coverage there. But you are correct that we paid out essentially our 100% of our taxable income yesterday last year in the form of a dividend. Part of that was also a gain on a asset sale, which drove a little bit of additional taxable income last year. So we’ve some room on the taxable income side. We do expect our taxable income to continue to grow with our portfolio. But at this point we feel like we got good coverage.

David Loeb - Baird

So no particular need to raise the dividend unless you have substantial gains?

Ken Cruse

Correct.

David Loeb - Baird

Okay thanks.

Operator

Thank you. Our next question comes from the line of Jeff Donnelly from Wachovia. Please go ahead.

Jeff Donnelly - Wachovia

Good morning out there guys. Few questions I guess starting with Steve, with the softness that you saw in the corporate transient, limited in a specific market or what are you seeing in your portfolio and what you are seeing, I guess, in respect to the leisure in that regard?

Steve Goldman

Hi, Jeff, how are you? I think the softness; we clearly saw it accelerated in San Diego, where we had additional supply. We've seen some general softness towards the end of the fourth quarter and in the beginning of the first quarter, but nothing systematic that you could draw a trend at this point.

Jeff Donnelly - Wachovia

And that goes for leisure as well as corporate transient?

Steve Goldman

Yeah, we've seen a little bit of softness in New York on weekend, little bit in Chicago, a little bit in San Diego but again, nothing systematic that we're going to push the panic button on yet.

Jeff Donnelly - Wachovia

Okay, and may be on, I just didn't followed you earlier but concerning the Fairmont Newport Beach, are you guys going to receive the fourth quarter 2007 guarantee from them in 2008, I guess, I'm trying to determine whether you get both the payment for 2007 and 2008 or are you forgoing one of them?

Steve Goldman

Yeah and let me give you some background, because you'll probably ask the follow up question too, as we began to work on calculating the ROI guarantee payment for 2007, that would have been paid in 2008. Frankly, we identified some ambiguities in the management agreement, related to the deductibility of certain expenses, as well as the amount of credit we would receive for certain investments.

So we actually had a bit of a dispute as to how to calculate the payment, and more importantly, what the basis would be for our investment going forward. So we and Fairmount both wanted to tighten up the language in the agreement prior to determining the total amount on the guarantee payments. We didn’t finalize the language until after the books were closed for 2007. So as part of the negotiation we agreed to waive the guarantee payment due in 2007. So in answer to your question, we will not receive a 2007 payment in 2008, but the waiver will in no way affect the total amount payable under the guarantee, which remains currently at the full $6 million.

Jeff Donnelly - Wachovia

It's just the timing issue effectively.

Steve Goldman

Yeah, effectively as opposed to the guarantee if it we're to be burned out, which we're hopeful that it doesn't get burned out. Effectively if we didn't waive it in 2007 say that would go through 2007, 2008, 2009 whatever. Now it goes from 2008, 2009, 2010 whatever.

Jeff Donnelly - Wachovia

I'm curious, why not have it work the other way, where they effectively pay you under the previous interpretation of the agreement then sort of credit them next year.

Steve Goldman

You know frankly it was a give and take. I was not prepared to reduce the guarantee payment, to reduce the items of expense that we believed were deductible, I was not prepared to reduce the capital investment. So one of the ways to bridge the gap and quite frankly. The reason that we're didn’t book anything for 2007 and why this went into 2008 was because if this didn’t get done, if we didn’t make an amendment, we were going to pursue a different path.

So as part of the give and take we thought that since we hadn’t booked it, that they had asked for a relief on the 2007 payment based on the way they had interpreted calculations, we agreed rather than to risk the future of the contract, which -- remember too the definition of the invested capitals goes not only to the guarantee but it goes to performance standards, it goes to the ability for them to extend, based on performance standards and it goes towards the calculation of incentive management fee. I didn’t want to make any compromise to the contract that any impacted that.

So the short answer to your question was, it was a given take and that was something that we were able to give to them, so they were satisfied with the outcome as well.

Jeff Donnelly - Wachovia

Okay then If I could I guess switch gears over to that the Century city and maybe different management contract. I am just closing the loop I guess on an old topic but at one point maybe about a year ago, it looked like you had a opportunity to effectively cancel that management contract and I am not suggesting that you do. But you might have that ability to do for a little incremental capital and then maybe you what you do to use that position to your advantage with Hyatt. Has there been nay movement there?

Steve Goldman

Well never actually had the opportunity to cancel the contract. What we had is there is a performance standard that kicked in after the fifth complete year of operation of the hotel and they were so far under water at that point, we had the opportunity to say guys, we don’t think your going to make it, maybe there is a different path that we want to follow.

So putting aside whether or not they are going to make the performance standard and my guess is that’s probably like three years from now and I think it kicks in 2012, it’s the first opportunity that we have to terminate them.

Putting that aside the properties is just doing so much significantly better that we just don’t think that’s a path of discussion to entertain right now particularly since -- frankly one of the reasons we believe its doing so much better is the relationship between Mark Hoffman and his guys, and David Horowitz, the General Manager and Mark Alan, the Regional Manager at the Hotel. It's fantastic and we've got a very cooperative relationship, where it's -- they are talking to us about how to better invest in the hotel. We're talking them about cost savings. They are talking to us about their cost savings. It really is a fantastic relationship and it really did turn the corner somewhere in the third quarter. So, to go down the different avenue at this point and frankly, we don't have any interest.

Jeff Donnelly - Wachovia

And how is the hotel looking now, I mean if you look at the 2008 your booking versus maybe the original underwriting I know wasn't really your underwriting at least from the

Sunstone side. How does it stack up?

Steve Goldman

The hotel is actually getting fairly close to its underwriting and the CP, the Century Plaza had 88% of its group rooms on the books for the year. The other thing that has been a very pleasant surprise there and remember this is also during the writer’s strike, which we saw some impact at the Century Plaza but not significant. The transient demand there has been absolutely phenomenal and that's really what's driven it because with the higher level of transient demand, you are less reliant on group business for compression.

Jeff Donnelly - Wachovia

And just one last question, I guess, sticking with Hyatt, you guys are exploring the timeshare project, at one of your properties in Orange County. Is there any update there or is that still on path?

Steve Goldman

Yeah, the time on that project is associated with environmental regulatory approvals and we're now at the point where we're very close to go into coastal commission which frankly is the longest and most difficult approval and it's very hard to handicap exactly how long that will take.

Jeff Donnelly - Wachovia

And thanks guys.

Steve Goldman

Okay. Thanks Jeff.

Operator

Thank you. Our next question comes from the line of Michelle Ko with UBS. Please go ahead.

Michelle Ko - UBS

Hi, guys. Good quarter. I was just wondering if you could clarify, can you give us a sense for how you expect to receive in the guarantee payment for the fourth quarter of ‘08? And also, if you could also give us a sense of how many non-core assets you think you might plan to sell in ‘08? And then finally, what your net interest estimate is for ‘08?

Steven Goldman

Okay. I’ll take those in the order you asked them. With regard to the Fairmont, we probably think it's somewhere between $2.5 million to $3 million for 2008. And again, remember, that’s at the NOI level, so the guarantee is not based on EBITDA, the guarantee is based on NOI. Its return to NOI, which is 9% I believe I stated in the prepared remarks, 9% on the 100 million plus whatever we spend above the FF any reserve going forward.

With regard to sell, I think we are fairly close with regard to a potential asset sale announcement this quarter. Going forward, I think a lot of that will be as it answer to one of the earlier question, that was asked, it lot of that's going to be just based on what the profile of buyers out there or and how they match up potential assets that we look to sell.

And with regard to interest question, Kenneth, you bang around and calculate, you want to go answer that.

Kenneth Cruse

No, I was working on something else, Steve. Interest expense of sale, good morning, if you look at our debt balance, they are $.7 billion of debt, weighted average interest rate is 5.5%. We look for a run-rate on that of about $93.5 million, plus you also got to take our share of JV interest for the Doubletree Times Square, which is going to another cost $7 million to $7.5 million depending on what LIBOR does. So, I would use the straight $100 million for this year as a run rate.

Michelle Ko - UBS

Okay, all right thank you.

Operator

Thank you, our next question comes from the line of Smedes Rose from KBW. Please go ahead.

Smedes Rose - KBW

Hi guys, I have just two questions here. Your RevPAR guidance relative to your margin guidance seems to imply some significant cost cutting or may be less growth in some of the non-core cost areas. I am just wondering if you could talk about that a little bit, I guess property insurance, workers comp, and other things. Have you actually began to cut cost at the property level or you just sort of beginning to?

Steve Goldman

Yeah, hi Smedes. That’s such a great question. Given the inflation trend, hotel expenses the convention wisdom and I think I heard on La Salle call, somebody told that at its somewhere around -- that margins will begin to erode when RevPAR growth drops to approximately 3%-3.5%. The low end of our guidance range indicates margins will be down 25 basis points with a 2% RevPAR growth.

We believe this is aggressive but achievable. First, we have been working closely with the brands to identify additional cost-cutting initiatives such as headcount reductions. Many of which have been already put in place. Second, through our working relationships with Sunstone properties which accounted for approximately 40% of our pro-forma 2007 EBITDA, we were able to mandate cost-containment initiatives faster than other owners who must work through the brands, systems, and channels in order to implement the deficiencies. I've said, the wonderful thing about our SHP advantage is that if we see any trends changing which they give to us real time. We see a trend change on a Monday. I call to Evan Studer, who runs those operations on a Tuesday. He goes to his operating people on a Wednesday and by Thursday everything is in place. So this combined with our ability to see real time data from these guys allows us to adjust properties without first going to any brand shelters.

Next, there is a lot of large expenses that we've got that don't necessarily grow in an inflationary way. Two of this expenses workers comp and property insurance are expected to be relatively flat year-over-year. We already know this. Our workers comp policy for our 26 SHP managed hotels and three Hyatt managed hotels that we reviewed in November 2007 was at 30% savings to the prior year’s program. This policy will run through October of this year. So we already have those savings in place.

Also, 2007 looks to be a light year for property insurance claims with no catastrophic events. So we believe that would result in further favorable cost impacts when we go to our renewal in June.

Smedes Rose - KBW

And when you looking at workers comp and property insurance, what sort of percent is that of your total overall expenses? Like under 10% or…?

Ken Cruse

Yeah it's probably under 10%. But it's a meaningful chunk and it is something that we have some control over.

Steve Goldman

And some higher level of certainty than some other expenses right now.

Smedes Rose - KBW

Okay and if I could ask one more, you mentioned the group revenue pacing for brand managed and then for your Sunstone managed. Just wanted on a blended basis across your portfolio, what does that equate to?

Steve Goldman

It's about 8%.

Smedes Rose - KBW

8%. Okay, all right, thank you

Operator

Thank you. Our next question comes from the line of Chris Woronka from Deutsche Bank. Please go ahead.

Chris Woronka - Deutsche Bank

Hey, good morning guys, nice quarter! Just wanted to a, drill down a little bit on the outlook and I think we've all kind of seen your fourth quarter pick up. For you guys maybe it was better but for the industry it didn’t really get any pickup on the short-term business. How do you look at that for kind of '08?

The 1Q, I think you mentioned you have a weak group calendar but what are the odds, how much visibility do you think you have and is there any disconnect between, kind of what of what you see on a real time basis from your Sunstone managed properties and maybe what the brand managers are telling you. Is there any disconnect there and how do you describe your visibility? Thanks.

Steve Goldman

Hi Chris. First off I don’t think there is any real disconnect from what we hear from the SHP guys. We actually had the manager's conference this week and so we got a chance to chat will all these guys individually on an informal basis. I don’t think that we've seen a whole lot of disconnect yet. I don’t think we've really seen a whole lot of disconnect yet in the brand managed hotels either.

I think the key question that you raised is the visibility and I think that’s where our management team and the management teams of the other lodging companies -- that’s just the uncertainty that’s associated with the general economy right now.

And in terms of looking forward, the guidance that we've given for the first quarter is consistent with what we've achieved thus far and what we can see through the end of the quarter. We have visibility starting through the second quarter but obviously as you get later into year the visibility is less due to the uncertainties associated with the economy.

Operator

Thank you. Our next question comes from the line of Amanda Bryant from Merrill Lynch please go ahead.

Amanda Bryant - Merrill Lynch

Great, thanks guys. Good morning, just wanted to ask you if you would mind please reminding us what are the big projects, driving your $80 million to $90 million CapEx budget for this year?

Steve Goldman

Okay, hi Amanda. If you say take a billion, billion one of revenue and you assume ongoing capital of 5% to 7%. That's $50 million, $60 million, $70 million right of the bat just for ongoing maintenance.

Amanda Bryant - Merrill Lynch

Okay, then you've had at the Long Wharf?

Steve Goldman

We'd the Long Wharf Marriott which was acquired of $14 million, $15 million project, I think about two thirds of it is gone to be in 2008. We've got a renovation going on, which we started last year in Houston, which is beyond that 5%.

Those are really the big ones. That's about $7 million, $8 million of that and I mentioned also the International Hotel that's about $4 million, $5 million renovation associated with the conversion of one of the floors to luxury rooms.

Amanda Bryant - Merrill Lynch

Now should we except you’re maintenance portion of your CapEx to decelerate as you go forward into '09?

Steve Goldman

That's a great question because as a practical matter because you want it to decelerate it doesn't. And I am not trying to be fictitious. It's just -- the fact of the matter is it is a capital intensive business and we spend ours, I’ve actually got the guys that I spent the hours with sitting in the room here talking about how we spread our capital, where we should invest our capital in the properties? Over what period of time? When do we do require room renovations? How much can we delay? When do we start the design process?

And I think the fact of the matter is; as business activity goes down, the capital needs of the hotel would probably still be fairly consistent. The trick is looking at spending every dollar and making sure that the dollars we're spending are high impact dollars and at the same time, we're not avoiding the necessary repairs, so our hotels don't fall into ongoing or long-term disrepair.

So, to answer your question we're just like hawks in terms of where we spend every single dollar and what the outlook for spending is, not just in the current year but over a three year plan for every hotel in our portfolio and we match that up against business conditions. We match that up with potential needs to conserve our cash. We match that up with potential other uses of our cash and try to find the best piece of the puzzle fitting to maximize the value of the company.

Amanda Bryant - Merrill Lynch

Okay, thank you.

Operator

Thank you, our next question comes from line of Michael Salinsky from RBC Capital Markets. Please go ahead.

Michael Salinsky - RBC Capital Markets

Well, good morning guys and congratulations on a good quarter. I apologize if you addressed any of these questions in the opening remarks but in terms of your outlook for fiscal year '08, you're not assuming recession just to be clear?

Steve Goldman

We're assuming to slow down the economy; we're assuming overall GDP increase somewhere around 1.5%.

Michael Salinsky - RBC Capital Markets

Okay, in terms of your outlook for food and beverage for the year?

Steve Goldman

The question of food and beverage growth?

Michael Salinsky - RBC Capital Markets

Yes.

Steve Goldman

We expect the growth in food and beverage revenue will slow down from 2007 increases but still be above 2007.

Michael Salinsky - RBC Capital Markets

Okay. Just a quick bookkeeping question. The Buy Efficient LLC sale, which you had during the quarter, was that gain included in the other income, and if so what's that amount?

Ken Cruse

Yeah, the gain was included in other income. It was about $6 million.

Michael Salinsky - RBC Capital Markets

Okay. And then finally, in terms of a new supply for fiscal year '08, is there any particular market you're specifically concerned about or how is the supply picture shaping out for '08 right now?

Steve Goldman

Yeah. In the near term there is some big convention hotel projects coming online by the end of 2008, San Diego, Baltimore and DC. These are markets that are all adding large convention hotels and we anticipate that there could be some impact. We stated in the prepared remarks that new luxury supply has already hit us in San Diego and impacts got W there. My personal view of all the markets where we've got supply coming in and the one that concerns me the most is Baltimore, because we've got supply coming into the particular market and we've also got supply coming into the DC corridor, which may pull out of that market.

Michael Salinsky - RBC Capital Markets

Great thanks guys.

Operator

Thank you. Our next question comes from the line of Dennis Forst from KeyBanc. Please go ahead.

Dennis Forst - KeyBanc

Good morning, I had a couple of questions. I am actually just trying to get my model right for room nights, I know that your room nights are based on both the Marriott and in the other nights I kind of ask this regularly maybe Bryan knows the answer but what were the number of room nights in the fourth quarter and what do you expect them to be in the first quarter.

Ken Cruse

Let me start out with that one and I think we can work with you probably offline on this one. You know we got just over 16,000 rooms in our portfolio. So on an annual basis you get about 5.9 million of total available room nights.

Dennis Forst - KeyBanc

That includes the Doubletree in New York.

Ken Cruse

That does not include the Doubletree, that does not. So on a straight line basis every quarter we are going to do about 1.5 million room nights per quarter. Are you asking about availability of room nights?

Dennis Forst - KeyBanc

Yes total available room nights.

Ken Cruse

Yes, So for the fourth quarter your actually going to have slightly more because the Marriot portfolio has an extra period in the fourth quarter. So, but we can’t give you specific numbers but your essentially 1.4 per quarter for 1, 2 and 3 and about 1.6 for Q4.

Dennis Forst - KeyBanc

Okay great that’s it. I’ll talk offline about some of the things. Thanks.

Steve Goldman

Thanks Dennis.

Operator

Thank you at this time, I show there are no further questions in the queue. Please continue with any closing statements.

Steve Goldman

Once again we’re very proud of our accomplishments for the year. We’re looking forward to exceeding the targets that we’ve set for 2008 and again we appreciate everybody’s continued support of Sunstone. Thank you very much.

Operator

Thank you. Ladies and gentlemen, this concludes the Sunstone Hotel Investors fourth quarter conference call. If you would like to listen to a replay of today’s conference please dial 800-405-2236 with a pass code of 111-074-67 ACT would like to thank you your participation. You may now disconnect.

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Source: Sunstone Hotel Investors Inc. Q4 2007 Earnings Call Transcript
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