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Sunstone Hotel Investors, Inc. (NYSE:SHO)

Q2 2008 Earnings Call Transcript

August 5, 2008 5:00 pm ET

Executives

Bryan Giglia – VP, Corporate Finance

Bob Alter – CEO

Art Buser – President

Ken Cruse – CFO

Analysts

Jeff Donnelly – Wachovia Securities

Michael Salinsky – RBC Capital Markets

David Loeb – Robert W. Baird

Michelle Ko – UBS

Operator

Good afternoon, ladies and gentlemen, and welcome to the Sunstone Hotel Investors’ second quarter conference call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. (Operator instructions) As a reminder, this conference is being recorded today, Tuesday, August 5, 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.

Bryan Giglia

Thank you and good afternoon, everyone, and thank you for joining us today.

By now you should all have received a copy of the corresponding earnings release. If you do not yet have a copy, you can access it on our investor relations tab of our website at www.sunstonehotels.com. Before we begin this conference, I'd like to remind everyone that this call contains forward-looking statements that are subject to risks and uncertainties, including those 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.

We 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 earlier today.

With us today are Bob Alter, Executive Chairman and Chief Executive Officer; Art Buser

President, and Ken Cruse, Chief Financial Officer. Bob will begin the call with a general update and a review of the highlights from the quarter; Ken will provide an in-depth review of the quarter and discuss our capital structure and credit ratios. He will also provide third quarter and updated full-year guidance. Following their remarks, the team will be available to answer questions.

To begin the discussion, I would like to turn the call over to Bob. Bob, please go ahead.

Bob Alter

Good afternoon, everyone, and thank you for joining us today. Before we begin with a review of the quarter, I would like to introduce our new President, Art Buser. As you all know, the Board began its CEO search process in March of this year, identifying 20 high quality candidates. The Board selected Art from a distinguished and highly qualified field of candidates during the comprehensive search process. 0The Board was focused on selecting a leader who would work well within the Sunstone’s culture who has the skills to optimize the performance of our high quality portfolio and who has the vision to set the strategy that will maximize our long-term returns to our shareholders.

Art brings over 31 years of hospitality industry experience, including 15 years of real estate transaction and assets management expertise to Sunstone. His wealth of hospitality experience encompasses all facets of the business, including acquisitions, dispositions, assets management and capital market. I am confident that Art has the integrity, passion and dedication to excel as CEO of Sunstone. Art began his employment with Sunstone on July 21 and he will become the CEO in 2009 after a transition period. With that, Art, would you like to say a few words?

Art Buser

Thank you, Bob, and, yes, I will take your cue to keep it to a few words. Good afternoon, everyone, and welcome to Sunstone Hotel Investors second quarter 2008 earnings conference call. I spent the last couple of weeks with Bob touring around and seeing the properties and again having just been with Sunstone three weeks now, I will keep my comments brief.

Few things I noted about the property and the people. About the property, generally I find that they are in excellent condition, but what I am most impressed with is the majority of these properties really are performing at above 100% in terms of the competitive set/ Really what I am most impressed with is many of them are increasing their rank in their competitive set even in these difficult times with the accelerating RevPAR. I think that speaks volumes of the commitment of the assets management people, the assets management team and as well as our operating partners; the latter I have been most impressed with their level of co-operation.

I’ve now had the opportunity to interact with everybody on the team and I can tell you confidently that this is really a group of people that have both the desire and the ability to be best in class and that’s really what attracts me here. Despite the challenging economic conditions, I think Bob and the team have done an excellent job of positioning the company for the future, and I look forward to working with everybody to further Sunstone’s programs of increasing shareholders value. For all of you listening in, I appreciate the well wishes from you that I already met and for those who I hadn’t met, l look forward to meeting many of you in a week in San Diego.

And with that, Bob, let me turn it back to you. Thanks.

Bob Alter

Thank you, Art, and again welcome to the team.

I am very pleased that we are able to bring Art aboard and feel confident we’ve completed this transaction – when we have completed this transition period, Art assumes the CEO position, the company will be in good hands to guide it through the next phase of growth. I continue to be pleased with our portfolio’s performance during the quarter. With our hotels posting positive year-over-year growth in total portfolio RevPAR and hotel operating margins despite a slowing economy and a challenging operating environment.

As many of you know, during the quarter, we sold the Hyatt Regency Century Plaza marking the conclusion of yet another highly successful hotel investment with Sunstone through which we created significant value for our shareholders by renovating, repositioning and re-branding an under performing asset. We acquired the Century Plaza hotel in October of 2005 for approximately 400,000 per room and implemented a business plan that included conducting a major renovation, installing Hyatt as our new manger, and positioning the hotel to maximize its appeal to both the group and business travelers in light of the re-merging of Century City as an LA’s premier entertainment market. In addition to completing the room’s public face, we added the successful X Bar Lounge and created high-end Equinox health club in an underutilized 35,000 square foot building on the hotel grounds.

During our ownership period, we implemented a number of successful asset management initiatives aimed at unlocking new revenue and streams and achieving a strong return on our invested capital due in large part to a successful execution of our plan and strong performance by the Hyatt team, we were able to increase top line revenues by 31% and bottom line profits by 190% during our ownership period. Additionally, during our ownership period we received a total of $27 million in yield support payments from Hyatt, which guaranteed an annual 10%, return on our equity through the third quarter of 2007.

The combination of a well planned renovation, creative asset management and meaningful yield support from Hyatt enabled Sunstone to realize total IRR on the sale of 19%. We compounded the value of the Century Plaza transaction by enlisting $129 million of the proceeds into our on stock, buying back 7.4 million shares or approximately 12% of our fully diluted shares outstanding at a price point significantly below what we believe to be our warranted net assets value.

We hold the remaining sale proceeds in cash, meaning currently, we hold more than $5 of cash and cash equivalents per share. Today our Board of Directors authorized $100 million increase to our 2008 share repurchase program. With this increase, the company has $109.2 million remaining under our 2008 repurchase program. As evidenced by this announcement, we continue to believe that our stock is a very compelling investment alternative.

We currently intend to retain a sizable portion of our excess cash on our balance sheet as enhanced coverage of our fixed charges and common dividends until such time as the US economy is in more solid footing. We continue to evaluate a variety of shareholder value enhancing investment alternatives for the remaining of our investable cash. I think today’s economy warrants a large cash position and we believe that holding on to the cash and looking at our alternatives over the next few years may be the best alternative for our shareholders.

Moving to our performance for the second quarter, adjusted EBITDA was 85.2 million, down slightly from last year and adjusted FFO as a result of our buyback was up 9% from last year to 0.87. Second quarter 2008 total hotel RevPAR increased 3.7% driven by a 4% increase in ADR which was partially offset by 20 basis points decline in occupancy. The result was slightly below the low end of our previous stated range, primarily due a greater than expected softening in travel. Our total RevPAR for the second quarter compares favorably to the US upper upscale RevPAR, which increased 1.3 in quarter two.

Comparable RevPAR excluding the Renaissance Baltimore and Renaissance Orlando, our two non-comparable hotels experienced – that had experienced material and prolonged business interruption during 2007 increased 2.6, also well above the US upper upscale average. During the quarter, we continued to realize the benefit of our investment surrounding the Mayo Clinic in Rochester. As the portfolio continues to realize double-digit RevPAR growth driven in part by the increased demand for our high-end hotel within a hotel known as the international at the Kahler Grand.

We are currently converting 40 regular hotel rooms within the Kahler to an additional 19 hotel rooms in the international section. This project is scheduled for completion in the fourth quarter; going forward, we may consider conversion of additional regular rooms at the international as well as Hyatt and (inaudible) conversions within the approximately 1 million square foot of building area comprising our Kahler Grand properties.

Although our RevPAR results finished below our previous guidance, we were able to deliver EBITDA and FFO per share above the midpoint of our guidance. This aggressive bottom line performance is a testament to the assets management capabilities and the value of our relationship with Sunstone and its health properties. Our continued focus in 2008 is to maximize the performance of our portfolio. To this end, the assets management team has identified considerable cost reduction throughout our portfolio. Our asset management team continues to work closely with our third party operators to ensure that appropriate cost measures have been taken that will continue to focus on their sales efforts as revenue management strategy to maximize at the hotel’s top line performance.

Consistent with that, we witnessed in quarter two economic conditions continue to deteriorate more than we had previously anticipated. The slowing economy combined with record high gas prices reduced (inaudible) to put continued pressure on the remainder of 2008 and possibly into 2009. Because of this lower outlook, we have reduced our guidance for the remainder of 2008. That said, we believe we are well positioned to weather this storm. We’ve recently renovated high quality portfolio located in many of the top gateway US market and expect we will continue to outperform US upper upscale market. As I mentioned before, we also have significant liquidity to weather the current economic turmoil. Going forward, we expect to opportunistically deploy our excess cash in ways that create shareholders value.

With that, I’d like to turn the call back over to Ken to take you through additional details on the quarter and to review our capital structures and credit ratio as well as details on the third quarter and full year guidance. Ken?

Ken Cruse

Thank you very much, Bob. Good afternoon everyone and thank you for joining us today.

First let me spend a few minutes drilling down on our RevPAR performance during the second quarter. As Bob said, total RevPAR was up 3.7% for the quarter driven by a 4% increase in average daily rates and a slight decrease in occupancy. And comparable RevPAR was up 2.6%, double the US upper upscale average according to Smith Travel. Our California properties generated 1.9% growth in comparable RevPAR during the quarter. Further Los Angeles and Orange county area hotels were basically flat to Q2 2007. Q2 RevPAR growth was negatively impacted by weakness at the Marriott Ontario, Sheraton Cerritos and Hyatt Regency Newport Beach.

San Diego rebounded this quarter with a 1.8% RevPAR growth during the quarter. Excluding the W San Diego, which us completed common space renovation and continues to be impacted by new luxury supply in the market, the San Diego region was up 4.6% for the quarter. The middle Atlantic region also turned in solid results with a 3.4% increase in RevPAR for the quarter primarily as a result of strength at the Time Square property as well as Boston.

Our two non-comparable hotels, the Renaissance Baltimore and Renaissance Orlando continue to realize double-digit year-over-year RevPAR growth and exceptional improvements in market penetration as they continue their post renovation ramp up. We expect this growth to moderate over the coming quarters due to tougher comps and new supply coming online in the Baltimore market.

Comparable hotel operating margin for the quarter increased by 20 basis points slightly less than we had anticipated but our ability to deliver margins expansion in the context of just 2.6% RevPAR growth is a credit to the efforts of our assets management team and our operators. We continue to seek out new ways to implement efficiency measures and cost controls in our properties.

Sunstone also continues to benefit from one of the lowest management fee structures in the business. Our management fee expenses including incentive management fees wee just 7.2 million in the quarter or less than 3% of gross revenue which compares very favorable to our lodging REIT peers. We ended the quarter with $1.7 billion worth of debt, 100% of which is fixed at an average rate of just 5.5%, or approximately 100 to 150 basis points below current market rates.

The average terms of maturity of our debt is 7 years assuming we redeem our 4.6% exchangeable notes on the first call date is 2013. And we have no significant debt maturities until December of 2010, which’s the 81 million mortgage on the Hilton Time Square, which represents less than 5% of our debt balance. We have no near term needs for external financing. We have 11 hotels that are unencumbered of debt, including the Fairmont Newport Beach and the Marriott Boston-Quincy. These assets provide a means to access significant amounts of mortgage capital should the need arise.

Additionally we finished the quarter with approximately 444 million of cash on hand, and even after adjusting for the 129 million in cash invested in share repurchases we maintained over $5 of cash per share. We also have no borrowing outstanding on our 200 million-credit facility. We believe that especially in this challenges operating environment, the liquidity provided by our excess cash and undrawn credit facility gives us a major competitive advantage both in terms of debt and security and our ability to capitalize on opportunities we expect to arise during this phase of the cycle.

In July, we completed a stock tender offer and repurchased 7.4 million shares at a price well below our estimated net assets value per share. Year to date we’ve retired 8.1 million shares. As Bob mentioned, today our board of directors authorized an increase of 100 million to the 2008 repurchase program. With this increase, the company has 109.2 million remaining under the 2008 repurchase programs. With our shares currently trading at an FFO yield in excess of 20%, we feel our shares represent a compelling investment.

With respect to our credit ratios, we ended the quarter with a pro forma net debt to EBITDA of approximately 5.35 times, which is within our long term target of 5.0 times to 5.5 times. We ended the quarter with a pro forma fixed charge coverage ratio of approximately 1.9 times which is slightly below our long-term target level. This decline in our fixed charge coverage ratio from the last quarter’s level is in part the product of our substantial cash balance which while very safe is much lower yielding in a typically hotel investment. Based on the mid point of our 2008 guidance our common dividend payout will be below 70% of our cash available for distribution or CAD. Going forward we will continue to evaluate our dividend level and stock repurchase policies with an aim to maximize the returns to our stockholders.

With respect to guidance, as Bob mentioned, considering the current economic outlook the expected impact of lower airline capacity and the reduced demand strength we are seeing across all segments, we’ve adjusted our full year guidance. I want to also point out that the guidance we are providing at this time is based on the expected performance of our existing portfolio, including all completed acquisitions, dispositions, debt repayment and stock repurchases. Our guidance does not assume any additional acquisitions, dispositions, debt repayments or stock repurchases.

The full details of our guidance can be found on our earnings release, I will just walk you through the highlights at this point. For the third quarter, we expect the change in total RevPAR to range from zero to a decrease of 2% as compared to quarter three 2007. We expect comparable RevPAR to range from down 1% to up 1% over Q3 2007. And we expect both total hotel portfolio and comparable portfolio operating margins in the third quarter to be down approximately 50 to 100 basis points compared to the third quarter of 2007.

For the full year, we expect both total and comparable RevPAR to range from a decrease of 1% to an increase of 1.5% over full year 2007. We expect both total and comparable hotel portfolio operating margins to range from flat to negative 100 basis points over 2007 depending on revenue growth and the continued effectiveness of our cost efficiency measures.

I will wrap up my comments by saying that considering the challenges economic and operating environment, we are very pleased with our performance during the second quarter of 2008. In spite of softness in the economic and changes in our organizations, we remain focused on our plan. Through this continued focus we believe we are positioned the company to produce solid results this year and beyond. I speak for the entire team when I say that we’re looking forward to a new era of growth under Art’s leadership. Thank you very much for your continued support and interest in Sunstone and I will now turn the call back over to Bob.

Bob Alter

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 value of our assets. We own a geographically diverse portfolio of high quality primarily upper upscale hotels. The implementation of increased levels of discipline and accountability continue to bear fruit as our second quarter results demonstrates. We believe our balance sheet provides strong dividend support and capital resource to take advantage of investment opportunities we expect to rise during this phase of the lodging cycle. As well as less capitalized hotel owners become compelled to sell.

Lodging industry as I've said many times is a street corner by street corner business. We believe we have the best growth potential among our peers. Our assets are located in great street corners. Our capital deployment strategy is focused on intelligently positioning re-branding and renovating projects. Our assets management expertise is second to none and our current strategy is to focus on internal cost efficiencies, while maintain conservative balance sheet and a disciplined approach to investment. I doesn’t hurt to have a little bit of cash in the bank as well. Historically the greatest opportunities are found during this base of the cycle and we are positioned the company well to take advantage of such opportunities as they arise.

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

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question comes from Jeff Donnelly with Wachovia Securities. Please go ahead.

Jeff Donnelly – Wachovia Securities

good afternoon guys and welcome aboard, Art.

Art Buser

thanks, Jeff.

Jeff Donnelly – Wachovia Securities

I guess first question I have might be for Ken, on the one hand you are talking about the benefits of holding cash and you guys are authorizing more share repurchases, I guess which is (inaudible)

Ken Cruse

Jeff, as we mentioned on the call, we have $444 million of cash in the bank at the end of the quarter, so the $100 million share authorization doesn’t put much of a dent in that balance. And you know obviously –

Bob Alter

So the math is 444 less the 145 [ph], 300 and we are authorizing an additional 100 million. So cash in the bank plus additional stockholder repurchases.

Jeff Donnelly – Wachovia Securities

And I guess what if any capital reinvestment or special dividend obligation might you have I guess lingering for 2008? And Bob how do you think about maybe a cash dividend versus a share repurchase?

Bob Alter

First of all, we don’t know the answer to the first question because we don’t know where our final net operating income will wind up at the end of the year. Clearly that – our cash obligation of the Century Plaza gain will depend on what that gain is, the net incomes at the end of the year versus our dividend so we have to kind of get closer to the year end to understand that. And then as we think about shareholders dividends versus stock repurchase, I think they are much more stockholder repurchases are much more tax efficient for shareholders than the dividends. And so the purpose in our view of a REIT is to be maximize the taxable distribution the non-taxable distributions so that’s the approach we are taking.

Jeff Donnelly – Wachovia Securities

And just I guess a question or two for Art, I know you just joined Sunstone but maybe just drawing on where you came from, can you speak a little bit to how buyers are underwriting assets right now, I mean specifically what sort of expectations for growth bet it RevPAR or cash flow maybe terminal value thee we are looking out for 2009, 10 and beyond?

Art Buser

I can tell you the amount of buyers that were out there when I left intermediary field about a month ago was about a 10% level that they were a year ago. So in summary there is not a lot of buyers looking. I think the big question that people had was what’s happening with RevPAR in 2009, 2010. Terminal cap rates I think people had kept pretty close to their historical levels depending on the quality of assets as well as the discount rate. I think the other question was people were assuming an acquisition today, there is some of refining in year two or three, which you might imagine really reduces your IRR. I think that’s will result in a big deltas in the 60%, 65%, 75%, leverage in kind of two year period, and I think that’s where you see the delta in values. But I think overall what I would say is there is a real lack both of product for sale as well as buyers that are out there. There are lot of people sitting waiting on their sidelines (inaudible). I think there’s a huge disconnect between Maine Street and Wall Street in terms of valuation and that is – and we see that in our share prices, but we had the opportunity with Century Plaza to go out and redeploys those assets in a 1031, and we went around and looked and talked to a lot of people and at the end of the day we just didn’t find the values as compelling as in this case our own stock. And when you do an under wring today, you are going to have to look at 2009 as a flat year with maybe maximum 2% RevPAR with profitability a maximum downside of 2 to 3%. I think you have to kind of run underwriting in that way. It will great in 2011, but who knows what it’s going to look like between ’09 and between now and then.

Jeff Donnelly – Wachovia Securities

I guess just one another follow up, has there been any materials change specifically for in a lager assets category and the financing markets in say the last 3 to 6 months. I know it’s certainly difficult but have you seen any loosening or tightening in that area.

Art Buser

what I saw was financing terms, both availability of debt and spreads deteriorating from last year till about April and then hey really hit the bottom. There was some shopping just three weeks ago involving certainly the banking market but I did not feel a lot of banks doing loans about 100 million all in rates of 7%. The key issue was coverage of 14 current, no forward looking credit given, and when you look at the few transaction that have been done, they really bit that for an larger transaction loan above a 100 million are very difficult to get. Century plaza case in point

Bob Alter

Case in point somebody got a loan, 200 plus million based on what I know about the terms which are not disclosable I though it was a reasonably good deal for this time in the market so there is money out there. Obviously they came in with a large down payment but I think the term, there’s money out there for transactions, it’s just not as inexpensive as it was.

Jeff Donnelly – Wachovia Securities

Thanks, guys

Art Buser

Thanks, Jeff.

Operator

Thank you. Our next question comes from Michael Salinsky with RBC Capital Markets. Please go ahead.

Bob Alter

Hi, Michael.

Michael Salinsky – RBC Capital Markets

Hello, good afternoon, and welcome aboard Art. Couple of quick question here as it relates to the second half of the year, CapEx for the year I think you’ve given a range of 80 to 90 million is hat still a good number?

Ken Cruse

Yes, the original CapEx number is pretty good at this point. There are obviously some moving parts in the latter half of the year but you can continue to use the 90 million.

Michael Salinsky – RBC Capital Markets

Okay. Given what we are seeing right now and Bob’s comments about 2009, 2010, should we expect to see that pull back quite a bit, are you looking at some of the projects differently at this point?

Bob Alter

I would say that our CapEx planning has certainly we’ve given our field the idea that they need to pull in a range for ‘09 and ‘10. I think that in 2006 and 2007, we spent over 130 million in both years on big renovations as a result of acquisitions. As it relates to 2008, we completed three major projects including a Hilton conversion in Houston from the Windham. We also have big renovation of the Holiday Inn in Downtown San Diego and we had a fairly large investment in the international in Rochester. In 2009, we have just two major room renovations planned and not a whole lot of other things ordinary course of business and that will determine whether we acquire additional hotels.

Michael Salinsky – RBC Capital Markets

Okay, that’s very helpful. In the first quarter, this year I think you guys are supposed to receive a guaranteed payment at the Fairmont, what’s the size of that right now?

Bob Alter

Unknown until we see what the year end is, we have a forecast in our numbers that keeps moving around based on their actual results. They actually had a reasonably decent second quarter and we are optimistic about the third and the fourth quarter. They have done a great job of keeping base business on the books, so we are optimistic.

Michael Salinsky – RBC Capital Markets

Okay. I think you previously mentioned 2.9, obviously conditions have changed since then, is it still in the ballpark round there?

Bob Alter

That’s still in the ballpark number.

Michael Salinsky – RBC Capital Markets

Okay, that’s helpful. Finally looking at the group booking here for the second half of the year and 2009 pace at this point, are trends welling up pretty well at this point or kind of –

Bob Alter

Our forecast that we just gave indicates that our group pacing number is up 2% over this time last year.

Michael Salinsky – RBC Capital Markets

Okay, and for 2009 pace?

Bob Alter

That’s 09.

Michael Salinsky – RBC Capital Markets

For the second half of the year here?

Bob Alter

Second half of 2008?

Michael Salinsky – RBC Capital Markets

Yes.

Bob Alter

They are both 2%. 2% off over previous first half of the year. For the second half of the year and our 2009 is up 2%.

Michael Salinsky – RBC Capital Markets

Okay, that’s all in both (inaudible).

Bob Alter

Primarily in rates, room rates are up slightly – room nights are slightly down, but rate is up.

Michael Salinsky – RBC Capital Markets

Okay, thank you.

Bob Alter

Thank you.

Operator

Your next question comes from David Loeb with Robert W. Baird. Please go ahead.

David Loeb – Robert W. Baird

Can I come back to the tax question and the special dividend my understanding of the way the rules work, share purchases are not going to make a difference in your distribution requirement right?

Bob Alter

Correct. Our net operating income is what determines our distribution requirements are.

David Loeb – Robert W. Baird

Right, including the gain.

Bob Alter

Correct.

David Loeb – Robert W. Baird

so at this point, given your relatively low payout to begin with, there is likely to be a need for some special dividend?

Ken Cruse

That’s a good assumption at this point. We are not going to know the size or the nature of that special dividend until the year progresses.

David Loeb – Robert W. Baird

So the question really is then how much of your cash do you use for the special dividend, how much for share repurchases and how much do you hold on for opportunities in the future?

Bob Alter

Cash [ph].

David Loeb – Robert W. Baird

And how long do you think before you start seeing those opportunities?

Bob Alter

Seeing opportunities to do –

David Loeb – Robert W. Baird

Make acquisitions.

Bob Alter

Opportunities to do what?

David Loeb – Robert W. Baird

Make acquisitions.

Bob Alter

Tell me when people are going to cut their expectations in the marketplace. When the seller of a high quality property in downtown market that we are interested in being in moves between 100 to 200 basis points and when our shareholders decide that the value of our company is high enough that we look at our weighted cost of capital and it comes down to an acceptable level. Based on our share price today had based on the cap rate that are asked on buyers we don’t see those opportunities.

David Loeb – Robert W. Baird

It seems to me though that Bob that those two measures are going to move in the opposite directions, that the market is currently attributing a much higher cap rate to your stock than what you guys would believe is appropriate, and yet what you are saying is you think that assets values in the market we need to see cap rates rise by 100 to 200 basis points. I mean to some degree does that mean that the value of your portfolio would be less as a result of that, the real value, not the current market implied value?

Bob Alter

I mean that’s kind of a subjective question because you have to say to yourselves at what point do you see a compelling opportunity and use your cash to take advantage of that. On the other hand, clearly at this level, at these levels, no one is going to be issuing additional shares when we believe our stock is so undervalued. So I think that you have to have a lot of things change before Sunstone becomes an acquirer of assets again and I think we are sitting on the sidelines to see how that plays out. Remember our assets are a function of the cash flow of those assets and then the combination of financing and cap rates, so we can’t always tell where that’s going to head but what we do know is that we like the assets we own. The ones we don’t like we are out in the market trying to sell; and then we continue to try to increase our cash flow, that’s our mission that we are telling our shareholders what we’re going to be doing for them

David Loeb – Robert W. Baird

Okay, thank you.

Operator

Thank you. Your next question comes from Michelle Ko with UBS. Please go ahead.

Bob Alter

Hi, Michelle.

Michelle Ko – UBS

Hi, how are you?

Bob Alter

Good.

Michelle Ko – UBS

Just wanted to see some of your peers have said they are trading at about a 10% cap rate but they are worth about 7% to 7.5%, what do you think Sunstone portfolio’s worth?

Bob Alter

I don’t think that’s appropriate, it’s only speculation. We happen to value our assets a heck of a lot higher than what our stock is trading at.

Michelle Ko – UBS

Okay. In terms of since you’ve had good success with selling the Century Plaza, are you still trying to sell some of your other noncore assets or other assets?

Bob Alter

We constantly look at our portfolio, decide what we think has the most growth in it, what assets we don’t think have growth in it. We’ve talked to folks about what they would be interested in buying form our portfolio in an attempt to try to maximize our shareholder value.

Michelle Ko – UBS

Okay, thank you.

Bob Alter

Thanks, Michelle.

Operator

Thank you, and there are no further questions at this time. Management would like to continue with any closing remarks.

Bryan Giglia

Thanks for dialing in until next quarter.

Bob Alter

Thanks for your interest; I appreciate your help. I’d like to just reiterate the information in our press release. I think the management of the company continue to be very confident in the actions that they’ve taken and look forward to a successful third and fourth quarters. Thanks very much.

Operator

Thank you. Ladies and gentlemen, that concludes the Sunstone Hotel Investors second quarter 2008 earnings conference call. Thank you for your participation and for using ACT teleconference.

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