Sunstone Hotel Investors, Inc. Q4 FY2025 earnings call

Talked about successful cost management last year leading to margin expansion. Mentioned expectations of asset transactions with demand for luxury assets, recycling assets as a strategy. Discussed operations of various hotels like San Diego with meeting space renovation, Waialea with transient spend, and performance of Montage and Four Seasons resorts.

Discussed cost management with expense growth around 3% for comparable 13 hotels, with margin expansion of ~40 basis points last year on ~3.5% rep part growth. 2026 has margin headwinds for comp portfolio, with ONDOZ adding noise. TAB expects total expense growth around 5% for total portfolio to align with REV part ranges.

Spoke about total rev par being lower than outlook due to factors like limited displacement in San Diego first quarter and slower group pace in DC. CapEx guidance of 95-115 million with largest projects front-loaded in Q1 and Q2.

Discussed that operating environment could be impacted by events outside control like government shutdowns, storms, midterms which can affect operations.

Q: Hey, thank you. Good morning. You know, a call earlier today talked about the expectation for being a net seller of assets. I wonder if that's your expectation as well, and if you have any update on the marketing process around the wine country assets.

A: Sure. Good morning, Dwayne. In the fourth quarter, we started to see a pickup in transactions, either closed transactions or announced transactions. And I think as we have more clarity into this year, debt markets continue to be strong. I think that we'll continue to see an uptick in transactions. thematically it will be similar. I think that there is a lot of demand for luxury assets. I think there's a lot of demand for cash flowing out. And so those obviously can support the highest debt balance and we're still seeing you know, for mid-size transactions, enough equity out there as you start to get to a larger assets, the bidder pool is still, you know, thinner. I do think we're seeing that improve. And so, you know, our view is really no different than what we were doing last year and when we sold um new orleans at a is a very attractive cap rate and and then redeploy those proceeds into our common stock um you know we're going to look to realize private market values for we can where we can um you know for those you know for hotels and resorts that we have where we see the biggest gap between the public and private market values. And basically, you know, we'll continue to try to unlock value where we can and then go and deploy that in the most creative manner. You know, we don't comment on transactions prior to announcement, but, you know, we have been clear and I think our actions have been very clear is that, you know, Major pillar of our strategy is recycling assets, so there's always going to be a point in time where we'll have one or more assets that in some form of marketing or discussion with potential buyers. And we don't think that this this year will be any different. The question then comes is what is that most secretive allocation of that redeployment of that capital? And that depends on a lot of factors. It depends on where the stock is. you know where our cost of capital is where stocks trading what you know and on a risk-adjusted basis what is you know is it to make more sense to repurchase stock or preferred does it make more sense to acquire an asset and over the last few years I think we've demonstrated that you know we've been able to you know pivot between those, sometimes in shorter time periods, but we've been able to effectively deploy that capital, whether it be through the acquisitions or buying back stock.

Q: Hi, thank you. I just had another question about your guidance just in terms of total rev par being a little bit lower than your rev par outlook. Usually, they're sort of at least in line or maybe total rev par would be a little bit higher. So, I was just wondering if you could just speak to that for a moment.

A: Sure, Smeets. Good morning or good afternoon. a focused portfolio with some some larger assets, D.C. being one of them I spoke about and then San Diego also that had a you know, we finish up a pretty substantial meeting space renovation or we finish a portion of it and we'll finish it the rest of it in the quarter. That's impacted on those two big hotels on the group side. That's going to impact some of our ancillary spend, you know, getting some of that back in in Andaz. And quite honestly, I would expect a increase in our total rev par if we continue to see the, you know, the transient trends in D.C. somewhat. But more importantly, the transient trends we're seeing in in Waialea with the additional spend that comes from the transient rooms, you know that will that will help buoy our our total rev par. But right now it's more a function of some of the, you know, limited displacement in the first quarter in San Diego and then a slower group pace in DC. It's more than anything.

Q: Thanks. Good morning, guys. Good morning. First one for Aaron. Just on this OHANA preferred, can you just remind us, like, what are the mechanisms there for you to take that out? When and by how much does that coupon ratchet? And then just on capital allocation, is this a potential use of capital if you were successful with dispositions?

A: Yeah, Mike, thanks for the question. So the OHANA you're referring to is our series you preferred, which is issued in connection with our acquisition of Montage. That one does have a mechanism where, the yield there is tied to a greater of the hotel yield or a fixed rate, which is currently now six and a half percent. So overall, it's even at 66 million in size. So it's a manageable amount of capital. We kind of view our preferred, I would say, as a total bucket. So it's all in the 280 million at a pretty attractive blended price of just around 5% or so. But as you saw in our results for the quarter, and we did take the opportunity to look at some buyback on the preferred side, and we'll continue to do that as a way to kind of just manage the overall preferred dividend exposure and ensure that we're mindful of the mechanism on the Series C, which does step up. So I think as we think about this year, I wouldn't expect that our preferred dividend would increase in 26 relative to where it was in 25, even with the escalation on the Series G, just given that we'll manage the overall outstanding balance. So, you know, we'll take another look at it as we move through the year. I mean, certainly, as we noted, we have, you know, $200 million of cash that we could readily put to use to address that Series G. And the function there is it's callable solely in our discretion. And it doesn't have to be in the total amount either, so we can take out pieces of it at a time.

Q: Hey, guys. Good morning. Thanks for taking the questions. So understood everything you said, Brian, about any potential transactions in wine country. My question on it is kind of do you think any sale process is having any kind of impact on operations right now? It looks like in 25 you had pretty good results with the montage. It looks like four seasons, maybe a little bit less so. So is there anything to draw from that in terms you know, what's kind of embedded in your guidance as to how those perform this year?

A: Yeah, I mean, both resorts were on pace to have very good years. As you probably remember, there was a fire close to four seasons that impacted the third quarter last year and a little bit trickled into the fourth quarter. So adjusting for that, that was probably about a million dollars of EBITDA. So adjusting for that, one, your question, you know, not commenting on a sale process, but typically for a managed hotel, the management contracts are long-term and stay in place, so that doesn't really impact the day-to-day operations of the hotel. Four Seasons has fantastic group pace for this year. I think group pace is up about 22%. um and so we have really great expectations for that again the um the san francisco market has been doing better which then leads to more weekend trips or extensions of convention trips out to to wine country the high-end luxury traveler continues to to be very strong and spend quite a bit and then on the other side of the valley um you know we have You know we've had great success with group at montage group is is. Not as strong as four seasons this year, but they're moving from a much larger base and our transient demand over at montage has been phenomenal. So I think transient pace is up 25% year over year. So just like San Francisco, a lot to look forward to in in. in the Bay Area and wine country.

Q: Good morning, guys. Good morning. For my question, you noted in the press release that the operating environment could be impacted both positively or negatively by events outside of your control. Could you speak to some of those events or macro environment that you contemplated for this year when putting together your guidance?

A: Yeah. Look, I mean, if you look over the last few years, Starting the each of the years expectations were higher and then. There were various headwinds that popped up and went away and came back throughout that time frame. I need to think DC is a is a good example of you know. What is our our? What are our expectations in DC? They're like I said, they're cautious this year. You know there was we did not expect the impact government business, government shutdown, those things for a large 800-room hotel in our portfolio, those were things that we weren't expecting last year and impacted operations. Could elements of that happen again? Sure. If we look at 26 in DC, it's You know, it's just starting off. It's a tough comp. We haven't yet inauguration the year before. We had storms in January's and you have midterms later in the year, which means Congress won't be in session a lot. As much so, those are things that keep us cautious, especially from the framework of the prior years experience. But then on the other side, you look at the positives there. You've got, you know, you've got the America 250 celebrations. Indy race that was just scheduled for August that's happening. Our transient pickup for January and February has been stronger than we thought. The negotiated transient demand for the next six months is up 11%. Part of that is still the benefit we're seeing from the conversion to Westin. Some of it is business that's coming back to the market. You know when you look at our transient demand for January and February and you put it against the backdrop of. You know we had weather issues this January. We didn't have an inauguration this year, but yet our transient demand is greater than what we had last year. That points to strength, and so that makes us very optimistic. The question is, is, you know, we probably need to see a few more months of this before our. you know, before we can, you know, have our outlook reflect that for the rest of the year.

Q: For my follow-up, more modeling related, on your CapEx guidance for 95 to 115 million, could you speak to the timing and allocation of those dollars between the different projects?

A: Yeah, let me let me start with that and then Aaron can go through some more specifics. We are working through and finishing the meeting space in San Diego. Keep in mind that it's a 1200 room hotel. It's a lot of meeting space, so there's 25 million of that number right there. A portion of that does come from the FF&E Reserve, and so that's That's a big piece of it. There's some, you know, there's some additional, you know, bills that are being paid and finish up work from ONDAWS. And then, you know, throughout the portfolio, we have various other projects, some HVAC projects, some roofing projects, some elevator modernizations. Those are probably those are spread out more throughout the year. The biggest chunk, you know, single chunk will come from the San Diego piece, which will be in the first and second quarter as it gets paid out. Yeah, and Brian basically got the punch line there. The largest projects will be front-loaded, so I'd expect about a third of it happens in Q1, and then Q2 will be the second largest contributor, and then the rest will trickle into the back half. But work largely performed in Q1 and then the payments in Q1 and Q2.