Sunstone Hotel Investors, Inc.
Q2 2013 Earnings Call Transcript

Published: 6 Aug 2013

[Operator:]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Q2 2013 earnings conference call. [Operator Instructions] I would like to remind everyone that this conference is being recorded today, Tuesday, August 6, 2013, at 9

[Bryan Albert Giglia:]

Thank you, Laura, and good morning, everyone. By now, you should have all received a copy of our second quarter earnings release and our supplemental, which were released yesterday. If you do not yet have a copy, you can access them on our website at www.sunstonehotels.com. Before we begin this call, I'd like to remind everyone that this call contains forward-looking statements that are subject to risks and uncertainties, including those described in our prospectuses, 10-Ks, 10-Qs and other filings with the SEC, which could cause actual results to differ materially from those projected. We caution you to consider those factors in evaluating our forward-looking statements. We also note that this call may contain non-GAAP financial information, including EBITDA, adjusted EBITDA, FFO, adjusted FFO and hotel EBITDA margins. We are providing that information as a supplement to information prepared in accordance with generally accepted accounting principles. With us on the call today are Ken Cruse, Chief Executive Officer; John Arabia, President; and Marc Hoffman, Chief Operating Officer. After our remarks, we will be available to answer your questions. Before I turn the call over to Ken, I'd like to remind everyone that with the beginning of this year, we adopted calendar reporting quarters for our 10 Marriott managed hotels similar to the rest of our portfolio, which also reports on a calendar basis. Last year, reporting for our Marriott managed hotels was based on a 13-period fiscal calendar. As a result of this calendar shift, our revenues, net income, adjusted EBITDA and adjusted FFO for Q2 2013 include 7 additional days of operations for our Marriott managed hotels as compared with Q2 2012. With that, I'd like to now turn the call over to Ken. Please go ahead.

[Kenneth E. Cruse:]

Thanks, Bryan, and thank you, all, for joining us today on today's call. I'll start by reviewing our second quarter earnings report and our recent transaction activity. Next, I'll discuss some leading indicators for our portfolio and the industry. And finally, I'll cover our rationale for reinstating cash, common dividends. Following my comments, John will discuss our capital investment program and the state of play in the hotel acquisitions market. Marc will then review our operations in detail and specific asset management initiatives. Finally, Bryan will go over our liquidity, balance sheet and guidance for the third quarter and full year before I wrap up our prepared remarks and open up the call for questions. To begin with, our second quarter was in line with guidance. Looking at the various components, our revenue per available room grew by 2.6% over the second quarter 2012, which was at the low end of our guidance range, due primarily to slightly slower-than-expected corporate group trends during the quarter. At the same time, our adjusted EBITDA, adjusted FFO and adjusted FFO per diluted share all came in at the high end of our guidance range. Our adjusted average daily rate grew by $6.50 to $188.89, while our occupancy declined by 80 basis points to 83%. Our quarterly decline in occupancy was almost solely attributable to renovation displacement at the Four Hotels in which we were completing major repositioning projects during the first part of the quarter. Excluding the 4 renovation hotels, our portfolio occupancy grew by 60 basis points to 83.9% in the quarter, which, on a same-store basis, is the highest ever second quarter occupancy level for our portfolio. Our comparable hotel EBITDA margins improved by 10 basis points to 33.1% during the second quarter. Here again, our margin performance was impacted by short-term displacement related to renovations. Excluding the 4 renovation hotels, our hotel EBITDA margins improved by 80 basis points to 34.7% in Q2 as our operators effectively translated incremental revenues into greater bottom line profitability through a variety of proactive profit improvement measures. Marc will discuss some of our profit improvement initiatives in greater detail later in the call. Moving on to transactions. Improving the quality and scale of our portfolio while gradually deleveraging our balance sheet has been and remains our core strategic objective. During the quarter, we completed several transactions that helped to advance this objective. On May 1, we acquired the 250-room Hilton New Orleans St. Charles as part of the 1031 like-kind exchange. On May 31, we redeemed all of our 6.45% Series C convertible preferred stock at face value of $100 million. We used cash from our February 2013 common stock offering to fund this redemption. The redemption effectively offset the leverage we took on pursuant to the Boston Park Plaza acquisition, which included the assumption of $119 million, 4.4% mortgage. On that point, after the quarter end on July 2, we closed on the $250 million acquisition of the Boston Park Plaza hotel. This transaction completed the tax-efficient recycling of proceeds from our sale of non-core assets earlier in the year. During our 2013 period of ownership, we expect the Boston Park Plaza to generate between $8 million and $9.5 million of adjusted EBITDA and between $6.5 million and $8 million of net operating income. I know many of you have questions about our long-term plans for the Boston Park Plaza. While we acquired this 1,053-room hotel as is at an attractive going-in yield, we see broad-ranging opportunities to enhance the competitiveness and value of this well-located asset. Our team has been actively engaged in framing out a comprehensive long-term positioning plan for this hotel, similar to the exercise we undertook when we acquired the hotel that is now the Hyatt Magnificent Mile in Chicago. As we are finalizing the plan now, expect more information on our strategy for the Boston Park Plaza later this year. To give you a better perspective on how both the Boston Park Plaza and the Hilton New Orleans St. Charles fit into our overall portfolio, we've included hotel level financials and full company pro forma adjusted EBITDA and FFO per share for Q2 and year to date for both 2013 and 2012 in our supplemental disclosures this quarter. I should reiterate that prior ownership recently added 112 keys to the Boston Park Plaza by splitting 112 larger rooms into 224 smaller rooms. As a result, year-over-year RevPAR for this hotel is not comparable and will not be included in our full year comparable hotel RevPAR statistics during 2013. As expected, while the additional rooms will have the effect of reducing the hotel's overall RevPAR, the hotel is on pace to increase total revenue by approximately 6% in 2013. Turning to hotel renovations. Our design and construction team has been very active this year on a broad range of repositioning projects. As of now, the team has completed all of our most disruptive 2013 capital projects. And as expected, we're achieving solid growth from hotels where we've recently completed renovations. For example, in July, our recently renovated hotels achieved average year-over-year RevPAR growth of 9%. We expect these solid post-renovation growth trends to continue during the second half of 2013 and beyond. Speaking of future growth, while we expect macroeconomic factors, such as sequestration, to continue to have an effect on the overall growth rate for lodging, it's important to keep such factors in perspective. The reality is that macro factors have tempered demand for lodging since the current recovery began over 45 months ago. Yet travelers are hitting the road in record numbers and our operators are gradually achieving pricing gains as occupancies are at or above prior peak levels. In short, while certain macroeconomic impediments to growth remain, we are seeing a number of green lights as we look ahead. One of the best leading indicators for our business is group booking productivity, which we define as of all future group room nights booked during a specific period. While corporate group was a bit softer than expected in the second quarter, our second quarter group productivity was very strong. Specifically, our same-store group bookings during the second quarter increased 20% over the second quarter 2012. This is record level group productivity for our portfolio. As a result, our current year group pace or group revenues on the books for the current year is now the strongest it has been over the past 5 years, and our 2014 group pace implies continued growth over 2013. Specifically, while our 2014 group pace was slightly below trend when we last spoke, our 2014 group pace is now up approximately 1.1% over 2013 pace, the same time last year. To be fair, in isolation, our 1.1% increase in group pace is nothing to write home about. But when considered in the context of the very high occupancy level of our portfolio, we expect that our solid 2014 group base will have to further improve the business transient pricing power of our hotels as the laws in supply and demand continue to move in our favor. Accordingly, we expect our RevPAR and earnings growth to accelerate in the periods ahead. To illustrate this point, for the month of July, our portfolio's comparable RevPAR grew by approximately 7%. In short, we believe the lodging recovery that began in December of 2009 remains solidly on track. Consistent with our prior comments, we expect continued gradual improvement in lodging industry fundamentals for the next several years albeit at a more gradual rate of recovery than during prior cycles. While we're seeing pockets of new hotel supply in certain of our markets, particularly New York, Chicago and Washington D.C., the trailing 12 months U.S. lodging demand-to-supply growth rate spread is roughly 2.2% in favor of demand, which is well above historical norms. This is a positive indicator for the health of our industry. As PKF projects sub-2% supply growth through 2015, we expect our industry's positive demand-to-supply ratio to persist for some time. While we do expect the U.S. lodging industry to see gradual increases in new hotel supply over the next 3 to 5 years, given the relatively limited availability of development capital and the material discount to replacement value of most in-place hotels, we believe overall hotel supply will, for the next several years, be meaningfully lower than the levels our industry has experienced during the last cycles. Meanwhile, we do expect to see continued growth in demand for upper upscale hotel rooms as the ongoing rebound in corporate profits and improving consumer and business sentiment continue to fuel higher rate of travel, especially in the major U.S. markets where we have hotel investments, which brings us to our rationale for the reinstatement of our common dividend. For a variety of good reasons, we've been a staunch holdout on reinstituting cash common dividends thus far during the current recovery. Specifically, while it has been our long-term goal to pay a well-supported stable cash dividend, our strategic objective of improving our portfolio quality and scale while gradually deleveraging our balance sheet has taken precedence over the past several years. While our portfolio of quality and balance sheet objectives remain paramount, we've made very good progress on these fronts over the last several years. As a result of select acquisitions, non-core hotel dispositions and our comprehensive renovation program, our portfolio is well positioned for growth. Additionally, we've materially improved our balance sheet through debt repayments, preferred equity redemptions and equity funded investments. In light of our progress on these fronts, we are now reinstating a well-supported quarterly cash dividend on our common shares. Our goal is to pay a base quarterly dividend through all phases of the cycle. Although our dividend rate may change in the future based on changes in our taxable income, risks affecting our business and the overall status of our portfolio and balance sheet initiatives, which I noted, all remain paramount. We believe that a $0.05 per quarter dividend in both the third quarter and fourth quarter of this year will satisfy our 2013 distribution requirements as we expect to utilize roughly $43 million of net operating loss carryforwards to offset our taxable income in 2013. In 2014, our taxable income will no longer be offset by NOLs or the distributions may have preferred securities we retired earlier this year. Beginning in 2014, we expect to make base quarterly cash dividends, and we intend to employ an annual year-end distribution to satisfy the balance of our taxable income distribution requirements. The size and nature of our year-end dividends will be determined during the fourth quarter of each year. We believe this approach will enable our investors to benefit from a relatively consistent and predictable quarterly cash dividend and a relatively high onetime annual dividend during the continuation of the growth phase of the lodging cycle. Again, our goal would be to maintain good base dividend support during any future cyclical downturns with our annual dividends flexing based on changes in our operating environment. Clearly, the reinstitution of cash common dividend is a positive milestone for Sunstone. And with that, I'll now turn the call over to John to discuss our capital and investment plans going forward.

[John V. Arabia:]

Thank you, Ken. Good morning, everyone. Today, I will provide an update of our internal and external investment activities, as well as an overview of the hotel acquisitions environment. Let's start with our recent and pending renovation activities. We're quite busy on the renovation front in the first half of this year as we invested roughly $69 million into our existing portfolio. These first half renovations resulted in $10 million of revenue disruption and reduced our year-to-date RevPAR growth by approximately 270 basis points. The most notable of these projects include

[Marc A. Hoffman:]

Thank you, John, and good morning, everyone. I will review our portfolio second quarter performance in greater detail. Please note that all statistics are for the 27-hotel portfolio, excluding the Boston Park Plaza, unless otherwise noted. First, let's start with group demand. As Ken noted, group demand continues to grow at a measured pace. As many of you are aware, group room rate growth has been modest thus far during the current recovery. And in fact, weak corporate group was the primary reason that our Q2 RevPAR came in at the low end of our guidance. For perspective, in 2012 compared to full year 2011, group room rates across our portfolio were virtually flat. Recently, this trend has improved as our operators have achieved more instances of group room rate increases as we burn off lower rate group booked during the cyclical trough. For example, group ADR increased over 3.9% in the second quarter and is expected to increase approximately 3% for the full year of 2013. That said, group rate increases remained sporadic and largely based upon market-specific factors. At the end of the second quarter, for our comparable portfolio, our group pace for the remainder of 2013 was up 3.6%, with a 50-basis-point increase in group room nights and a 3.1% increase in group rates. Group production for all current and future years in the second quarter increased 20% over the second quarter last year and was the highest second quarter booking production in 5 years. Our year-to-date group production has increased 3.2%. Our bookings were positively impacted by Renaissance Orlando, Marriott Quincy and the Hilton San Diego Bayfront. In summary, group demand and pricing is improving in most of our markets. For our comparable portfolio, third quarter booking pace has grown to 8%, and our fourth quarter booking pace remains quite strong at 4.6%. As we look forward to 2014, our group booking pace for all 28 hotels is now positive 1.1%, which, as Ken noted, is a significant improvement to our 2014 pace from last quarter, which was a negative 4%. 21 of our 28 hotels are showing strong pace growth in 2014. The Renaissance Washington D.C. is coming off an outstanding 2013, where pace is up 22% versus 2012 and is expected to achieve group revenues above their prior peak levels. Removing the Renaissance Washington D.C. outlier, our 2014 pace for the portfolio is up 5.8%. Now let's focus on transient demand trends. More than 60% of our overall demand comes from transient travelers, with business travelers comprising the largest segment of our transient demand. While second quarter transient revenues were hindered by lost occupancy at the Four Hotels under major renovation, transient demand trends remained relatively healthy. With occupancy at or near previous peak levels, we expect transient rates to increase by approximately 3% to 5% in 2013 as increasing demand allows our revenue managers to remix the business towards higher-rated segments of demand. During the second quarter, our comparable portfolio, excluding the Four Hotels under renovation, were sold out approximately 28% of the time, which represents a 7% increase in sold-out room nights versus the second quarter of 2012. A few revenue management data points. Our premium room revenue improved 4.1%. Our corporate negotiated ADR grew 5%. And finally, our discounted room segments grew ADR by 7%, with discounted room nights declining 1.5% as our operators effectively shifted our business mix into higher-rated segments. In addition to the Four Hotels under the major renovation in the second quarter, we experienced below average or declining RevPAR in a few hotels. As expected, both of our New Orleans hotels experienced RevPAR declines due to a soft citywide convention calendar. On the other hand, several hotels delivered very strong results in the second quarter. RevPAR for our Chicago combination of Embassy Suites and Hilton Garden Inn grew a combination -- combined 8.8% through strategic mix shifting. Our Marriott Portland achieved a 19% increase in RevPAR as we employed an aggressive rate strategy following the completion of our rooms renovation earlier in the year. Finally, our 2 Houston hotels continue to achieve above-market growth with combined RevPAR growth in the second quarter of 9.5%. In spite of relatively soft top line growth, we achieved EBITDA flow during the second quarter through solid expense controls and various efficiency measures. Our hotel portfolio departmental expense for occupied room grew at only 1.3%. Our asset management team and hotels continue to constantly ask what if and how can we be smarter at running our business every single day. Whether from reduced menu sizing to creative labor staff management, our hotel cost models are positioned to take advantage of increasing ADR. However, we did experience some inflationary increases in sales promotion, real estate taxes, property insurance in the second quarter. I should note that we completed our property insurance renewal at the end of June, and we achieved a reduction of approximately 8.3% in property insurance premiums on a per key basis for the remainder of 2013 and the first half of 2014. Our portfolio benefited from cost containments in both hotel G&A and energy expenses. As discussed during our previous calls, we continue to improve our energy efficiencies and decrease our energy cost through various energy savings initiatives. These initiatives include installation of in-room intelligent heating and cooling systems, installation of variable frequency drives, retrofitting hotel lighting to LED more efficient lighting, installation of more efficient chillers and outsourcing of laundries. Over the past 3 quarters, we've implemented new energy efficiencies in 23% of our hotels. And as a result, these initiatives have helped reduce our quarterly energy cost with energy cost per occupied room declining 3.9% in the second quarter. For example, at the Hilton San Diego Bayfront, where we installed new lighting, intelligent thermostats and variable frequency drives, we achieved a significant 9.3% decrease in energy cost per occupied room during the second quarter, even while the hotel grew occupancy and revenues. As we continue implementing these energy savings programs, we are targeting returns well in excess of 20% of our invested capital. Let me turn now to Bryan to review our liquidity and guidance. Bryan, please go ahead.

[Bryan Albert Giglia:]

Thank you, Marc. I will now turn to our balance sheet and provide an overview of our liquidity and overall leverage profile. With respect to liquidity, Sunstone ended the second quarter with approximately $272 million of cash, including $72.3 million of restricted cash. Adjusting for the acquisition of the Boston Park Plaza, which was completed on July 2, our pro forma unrestricted cash balance at the end of the quarter would have been approximately $65 million. In addition to our cash position, we have an undrawn $150 million line of credit and 12 unencumbered hotels. During 2012, these unencumbered hotels collectively generated approximately $57 million of EBITDA. At the end of the quarter and pro forma for the acquisition of the Boston Park Plaza, we had $1.5 billion of consolidated debt and preferred securities, which includes 100% of the $233 million mortgage secured by the Hilton San Diego Bayfront. Adjusting for the debt attributed to our minority partner on this asset, our pro-rated debt balance is currently $1.47 billion, which consist entirely of well-staggered non-crossed mortgage debt and preferred securities. Our debt has a weighted average term to maturity of 4.1 years and an average interest rate of 4.9%. Our variable rate debt as a percentage of total debt stands at 29%, and we do not have any debt maturities through early 2015. As Ken noted, and as evidenced by our reintroduction of well-supported quarterly cash dividends, we are comfortable with our current leverage profile and our ability to continue to achieve our long-term credit milestones. Consistent with the track record we've built over the past several years, we expect to further improve our balance sheet and increase our financial flexibility in a methodical and shareholder-friendly manner as the lodging cycle continues. Now turning to guidance. A full reconciliation of our current guidance can be found on Pages 17 to 19 of our supplemental, as well as in our earnings release. As noted, with our major 2,000 renovations now complete and with a solid base of group rooms on the books, we expect to see an acceleration in RevPAR growth for the remainder of the year. For the third quarter, we see RevPAR growing at a pace of 5% to 7%. We expect third quarter adjusted EBITDA to come in between $66 million and $69 million, and we expect third quarter adjusted FFO per diluted share to be between $0.27 and $0.29. At the midpoint, this indicates a 22% increase in FFO per diluted share as compared to the third quarter of 2012. We tightened the range of our full year 2013 guidance to reflect our first half results. Our updated full year 2013 adjusted EBITDA guidance now ranges from $235 million to $245 million, and our updated full year adjusted FFO guidance now ranges from $0.91 to $0.97 per diluted share. Today's guidance reflects our ownership period of all completed 2013 transactions and does not include any potential future transactions. With that, I'll now turn the call back over to Ken to wrap up.

[Kenneth E. Cruse:]

Thank you very much, Bryan. I have just a few closing remarks before opening up the call to questions. Demand for lodging has been resilient throughout the current cycle despite persistent macroeconomic uncertainty and various industry-specific bumps along the way. As demand has improved, many of our hotels are now operating at or above prior peak occupancy levels and are approaching prior peak RevPAR and EBITDA production. Yet prior peak is merely a data point. As I noted, fundamentals for our business point toward continued growth in both revenues and profits over the next several years. Group pace and booking productivity are improving. Business transient demand remains very strong. New property level innovation and efficiencies are driving continued margin expansion, and industry-wide supply growth is expected to remain low for years to come. In short, the fundamentals point toward meaningful growth in hotel revenues, cash flows and asset values over the next several years. We're pleased with the progress we've made over the last several years and as we remain firmly focused on improving our portfolio quality and scale while gradually deleveraging our balance sheet. That said, I'd like to emphasize that while making smart, well-timed investments and finance decisions are fundamental to our business, as a hotel owner, our success is largely dependent on how our team creates value in our hotels after we acquire them. Beyond just investing in financing, proactive portfolio management, creative and at times fanatical asset management, as well as systematic and disciplined design and construction management are all key focus areas and core competencies of the Sunstone team. With each of our key disciplines well represented, in my opinion, the depth of the entire Sunstone team is one of our principal competitive advantages. We thank you for taking the time to listen today and for your continued interest in Sunstone. So with that, let's open up the call to questions. Laura, please go ahead.

[Operator:]

[Operator Instructions] Our first question comes from the line of David Loeb with Robert W. Baird.

[David Loeb:]

I want to ask about Boston, which I understand some reluctance on your part to answer. I'm curious about what the long-term vision is and how long it takes to get there. But also in the near term, as you apply your fanatical asset management at times, fanatical management, is there much you can do there? And we've seen the 8-K with the results of that hotel through the past few years, and it looks like Highgate has done a tremendous job of increasing the margins there. Is there much more of that to go in the near term?

[Kenneth E. Cruse:]

David, great question. I'm going to hand it over to Marc Hoffman, our fanatical head of asset management to take that one.

[Marc A. Hoffman:]

Thanks, David. Thanks, Ken. Well, in terms of the long-term plan for Boston Park Plaza, while we acquired Boston Park Plaza at an attractive going-in yield, we see broad ranging opportunities to enhance competitiveness and value of this well-located asset. We are actively framing out comprehensive plans now. We clearly will be looking at -- I mean, if you look at the hotel as it looks today, it's a 2.5 to 2.75 star hotel. We're going to take that position to 3.25 to 3.75 in general. The hotel from a group standpoint is not competitive to the other 4 major group boxes in Boston. We will clearly make it competitive. The plaza -- the Boston Park Plaza generates significant in-place cash flow. Our immediate business plan for the hotel entails the buildout and leasing up of 43,000 square feet of ground-level and below-grade retail spaces, which predominantly front Arlington and Park Plaza. As Ken talked about, we plan to invest significantly in mechanical, electrical, plumbing, heating, cooling, structural to really create a much more comfortable environment for the customers. Longer term, we may undertake a more comprehensive repositioning to further enhance the hotel's competitiveness. We're looking through that now, developing business cases, et cetera. As for Highgate, yes, the hotel has done a very, very good job. We believe that with the renovations, there are revenue and profitability enhancements that will occur due to the hotel being held back in some way from growth due to its current positioning.

[Kenneth E. Cruse:]

David, this is Ken. I'll just jump in and just sum it up by saying the hotel today lacks a cohesive experience that modern-day business travelers are looking for. Our plan is going to be to tie the rooms product, the public spaces, the meeting spaces together in a much more competitive and appealing way, and it's going to take us some time, as we said on the last call, to establish that complete positioning plan. But over the next quarter or so, you'll hear a lot more about it.

[David Loeb:]

And what do you think the NOI potential is from the retail?

[Kenneth E. Cruse:]

I believe we may have talked about that in the last call. We see the retail as potentially generating north of $1.5 million to $2 million.

[Operator:]

Our next question comes from the line of Ian Weissman with ISI Group.

[Ian C. Weissman:]

Just a couple of questions. John, you gave some interesting color on the current deal environment and the cap rates and the like. You talked a little bit more about your acquisition strategy. You've had a lot of success on the sales side. What are the thoughts about continuing that process and looking to continue to call your portfolio at these levels?

[John V. Arabia:]

We have sold several hotels over the past 18, 24 months and really have sold off a good portion of the lowest end of our portfolio. While we have debated, analyzed additional sales, right now, it's not a top priority. We will continue to receive inbound overtures for assets and evaluate them. But right now, I think the portfolio is in very good shape, and I don't think this position is going to be a primary strategy of ours in the very near term.

[Ian C. Weissman:]

Okay. And just 2 other questions. It sounds like you're still shielding, I think my number is correct, $43 million through NOLs, which are gone next year. Does that put the dividend at a run rate of about $0.12 a share per quarter? Is that right?

[Kenneth E. Cruse:]

So David -- I'm sorry, Ian, this is Ken. As I mentioned, we had about $43 million of NOLs this year, which will be fully utilized in 2013. We also had several million dollars of distributions on the Series A, as well as the Series C, which will go away. So just roundly, think about it as $50 million of nonrecurring tax shield in 2013 that won't be in place in 2014.

[Ian C. Weissman:]

Okay, that's helpful. And finally, Bryan, just to clarify a little bit on the comparable RevPAR growth that you're quoting for the quarter, what would be the dollar amount that we should assume for RevPAR in the third quarter that would be comparable to the third quarter of last year?

[Bryan Albert Giglia:]

Ian, give me 1 second while we -- so you're looking at the nominal RevPAR amount?

[Ian C. Weissman:]

Right. If you're saying you're going to do, let's say, 6% RevPAR growth in the third quarter, what's that comparable growth, what's the actual dollar RevPAR number for the third quarter range?

[Bryan Albert Giglia:]

So that would be in the 140 to 150 range.

[Operator:]

Our next question comes from the line of Smedes Rose with Evercore.

[Smedes Rose:]

I wanted to ask you just a little more on group. What percent of your group bookings for 2014 are on your books now? And I guess where would you -- is it in line with where you would expect it to be now?

[Bryan Albert Giglia:]

Yes. Smedes, so 2014 group on the books are about where they would normally be in a typical year. We've got a number of big hotels that start the year off with between 85% and 95% of their group rooms on the books. So we're pacing for 2014, which means that we're up a little bit for 2014 in terms of pacing. And so group rooms on the books for the larger hotels are, call it, 75% or so for 2014. The smaller hotels cross over the year at about 50%. And so there's a lot more in the year for the year still. So Marc, do you want to add more color there?

[Marc A. Hoffman:]

Yes, I mean, the total percentage of our rooms for the entire portfolio now is at 90%. We're in very good shape compared to where we are typically. So we've got 90% of our rooms on the books. We have very little to fill in for the remainder of the year.

[Bryan Albert Giglia:]

For '14.

[Marc A. Hoffman:]

I thought he was asking about '13, I'm sorry.

[Smedes Rose:]

No, for 2014, what percent of the rooms are on the books, group rooms?

[Bryan Albert Giglia:]

Just give us a second on that one, please. We have that information.

[Smedes Rose:]

And then I guess while you're looking through, I'd just be interested in your thoughts about New York for 2014, I guess, in light of your properties here and thinking about the supply coming along and the kind of thoughts you have on that would be helpful as well.

[Bryan Albert Giglia:]

Sure. Our 2 hotels in Times Square are very well-located hotels. We've got -- the Doubletree is located right at 47th and Broadway with fairly large suites. And so the hotel has performed well in spite of new supply. Similar story with the Hilton in Times Square, where you've got high-quality rooms, products well located. They compare pretty favorably to the new supply that's coming on, especially in the lower locations within the city. That said, supply will be a factor. We're going to see a 15% increase in supply in the Times Square market through 2015. This is from 2012 through 2015 to roughly 30,000-plus group rooms, they're plus hotels rooms. And in the broader New York market, you'll see a 20% increase in supply. So no question about it. Supply will overall dampen the demand, the overall growth rate in RevPAR for the New York market. We do feel that our hotels will perform well in the face of that supply relative to some of the other hotels that exist. Some of the other things that -- and we called this out on the last call as well. Some of the other things that will affect our RevPAR growth rate for the 2 products that we have in Times Square is just the change in the Hilton Honors system. I think you may be aware that they changed the point system. Materially devalued the points program across the board but specifically impacted our 2 hotels. And so while HHonors has been a fairly significant driver of room nights at our hotels in the New York market, that change will also further impact and has further impacted RevPAR growth in those hotels in the second quarter. We'll we see moderation in demand overall. I'm going to shift back over to Marc for the question on the overall group rooms.

[Marc A. Hoffman:]

Yes, Smedes. I'm sorry about that. I thought you said '13. In terms of '14, we have 52% of our room nights -- group room nights on the books, and that's the strongest number we've had over the last 4 years at this point.

[Bryan Albert Giglia:]

And again, for some of the larger hotels, you're closer to 75% given the fact that they booked more of their group rooms in advance.

[Kenneth E. Cruse:]

And just to follow up on Ian, Ian, your question on the nominal adjusted RevPAR for Q3 '12 was $141. So that would translate into a range for Q3 2013 about $145 or $150.

[Operator:]

Our next question comes from the line of Chris Woronka with Deutsche Bank.

[Chris J. Woronka:]

Can you just remind us kind of the normal tailwind you might get from some of these renovations? I mean, you talked about the Four Hotels specifically, and is it 3 quarters, 4 quarters or more than that?

[Kenneth E. Cruse:]

So I don't know that there's a normal tailwind on any renovation property. But certainly, for example, in Chicago, we would expect to have a very lasting tailwind given the nature of the repositioning and the comprehensive nature of the renovation program that we employ there, as well as the rebranding and all the other changes we made there. Hyatt Newport Beach is a similar story, where we really changed the character of the hotel, made it far more competitive from a leisure standpoint, in particular, added a lot of interesting features that are pulling in a lot of guests over the course of the summer months in particular. So for example, Hyatt Chicago RevPAR in the month of July was up 21%. Hyatt Newport Beach, RevPAR was up 13%. In Times Square, for a lot of the factors that we were just talking about in terms of just overall market trends and changes in the HHonors system, et cetera, was up less. It was up about 3.5% for July. So those are kind of 2 ends of the spectrum. We would still expect that the overall, I guess, aura of the new rooms product, for example, would certainly provide a competitive advantage for hotels for several years. It would be our expectation, and a repositioning program should last even longer than several years.

[Chris J. Woronka:]

Got you. And then I think what I heard earlier is that you do have some renovations coming up in back half '13, early '14. But should we think about virtually no EBITDA disruption next year?

[John V. Arabia:]

Chris, John Arabia here. I would say it's fairly routine. Most of these rooms renovations will be able to get into the rooms on very low periods. And so instead of talking about many millions of dollars of renovation disruption, I think we're literally talking about a couple of hundred thousand dollars of renovation disruption, which, quite honestly, for a portfolio our size is really routine and I really wouldn't model anything.

[Chris J. Woronka:]

Okay, got you. And then can you just remind us how much Boston Park Plaza is underpunching on RevPAR? And I know you haven't disclosed your plans yet, but where do you see that next year, just kind of on a normal -- from normal operating basis?

[Bryan Albert Giglia:]

Yes. So Boston Park Plaza year-to-date RevPAR, first quarter was down almost about 16%. Second quarter was down 6%. So year to date, it's down roughly 9%. We do see overall revenue, as I mentioned in our prepared remarks, for that hotel increasing this year by roughly 6%. Going forward, we see the hotel absent any repositioning program, we see the hotel performing with the market. 2014 is a very strong year for Boston overall with very strong citywide. So we're projecting fairly significant high single-digit growth rate in RevPAR for our Boston hotels in general in 2014.

[Chris J. Woronka:]

Great. And just one last question on Boston. I mean, how important -- as you think about possibilities for the hotel, I mean, how important is key money and really how many brand -- potential brand options do you think you have given what's already up there?

[John V. Arabia:]

There are several brand options. I'll tell you that branding the hotel today is not plan A. We like the idea of having a fee simple piece of real estate that's well located within the Back Bay market. Obviously, runs at a very high occupancy. It's obviously a very productive asset in its current state. So our view is that any key money from the various brands that may be interested in occupying this particular asset is probably not going to, based on our current math, be warranted in the context of what we can do absent the brand fees.

[Operator:]

Our next question comes from the line of Joshua Attie with Citigroup.

[Joshua Attie:]

Ken, is the repositioning of the Park Plaza a 2014 event, do you think?

[Kenneth E. Cruse:]

The repositioning of the Park Plaza is not going to be a 2014 event in all likelihood. We'll finish up our overall positioning plan this year. Likely, the first initiation of that would be in the winter months of the latter part of 2014, if we started that early. Our view once again is we want to take a very, very measured approach here, make sure we've got the right formula and measure twice and cut once, as they say.

[Joshua Attie:]

And separately, on the dividend, it's been a long time since you paid a dividend. Can you just kind of remind us of what your philosophy is? Is it to pay out the minimum and retain a maximum amount of free cash flow to grow the company? Or would you like to provide investors with a certain amount of income? I guess which is important to you and how do you think about it?

[Kenneth E. Cruse:]

Sure. And we could spend a lot of time on this one because our view is that as a capital-intensive company with fairly specific portfolio and balance sheet objectives, that paying out more than the required amount for dividends is probably ill-advised. I think there are probably times in the cycle when paying out more than the required amount would make sense. And you just heard us talk about on our prepared remarks the fact that during a cyclical downturn, for example, our efforts today are preparing the company so that we hopefully will be in a position to support our dividend through all phases of the cycle. So there could be a scenario where a minimal, as we talked about a base dividend, is paid through all phases. But as we sit here today, during the growth phase of the cycle, our portfolio and balance sheet objectives takes precedence over, overpaying on the dividend fund, if you will. We look at dividend as one component of total return. If you look at what our company has returned to our investors over the past couple of years through just consistent execution of our strategy, I think we've validated that statement pretty well.

[Joshua Attie:]

And just one more maybe for John. Do you think that Sunstone is a net buyer or a net seller of assets over the next sort of 6 to 12 months? It sounds like you called a lot of what's in the portfolio that you wanted to sell, and it also sounds like you feel like acquisition pricing is a little expensive. So I guess when you put it all together, do you see more opportunities on the buy side or on the sales side?

[John V. Arabia:]

As we sit here today -- and by the way, Josh, that could change over time. But as we sit here today, I think if we were all to make a bet, we would say that we'll probably be a net buyer of assets from what we see right now than a net seller.

[Operator:]

Our next question comes from the line of Ryan Meliker with MLV & Co.

[Ryan Meliker:]

Most of my questions have been answered, but I was just hoping to get a little bit of color on your outlook for the Renaissance in D.C. Obviously, you got the Marriott Marquis coming in next year just a couple of blocks away or so. How was group pacing looking for that asset in D.C.? I know you're coming off renovation now. The numbers are looking pretty good here to date. Just any color would be helpful.

[Kenneth E. Cruse:]

Sure. Washington D.C, as you know, is having -- as a market is having a fairly weak year. Our hotel, the Renaissance, which is located right at 9th and K, is having a very, very -- one of the strongest years that hotel has had in terms of overall group rooms and rates. So we're having a terrific year this year. Next year, you'll see a relatively soft citywide year once again in Washington D.C. And of course, you will see the Marquis come on to the market. So no secret. We would expect moderated trends for our D.C. property next year. You may actually see RevPAR flat to even slightly down next year, although we're working on our budgeted numbers right now. Long term, love the asset, love the location within the market. You've -- perhaps you're familiar with the redevelopment of the former convention center site that's right at the front door of that hotel, several billion dollar redevelopment that pulls the core of the D.C. market to our front door. So we're very, very excited about the long-term prospects for that hotel.

[Operator:]

Our next question comes from the line of Lukas Hartwich with Green Street Advisors.

[Lukas Hartwich:]

Ken, can you give us an update of where you think we are in the lodging cycle?

[Kenneth E. Cruse:]

Sure. I can tell you what we know, and then I'll tell you what we think. We're 45 months or so into the lodging recovery. It began about December of 2009. We see a lot of indicators that would imply that this cycle will be longer than some of the prior cycles we've seen. You probably heard us talk, and I know I've heard others talk, about the average lodging cycle from peak -- from trough to peak having a duration of roughly 7 years. There's no such thing as the average lodging cycle. And certainly, this cycle has all the earmarks of being a more prolonged recovery. So the best I can tell you is we're in the middle stages of the cycle. We are in the phase of the cycle where occupancies are at levels where operators can push rate much more aggressively. We're in the phase of the cycle where operational efficiencies and the fact that demand is being absorbed by rate more than occupied rooms will ultimately result in continued growth and profitability. So I can't tell you how much longer the cycle will last. We do model a cycle internally that based on all the factors that are in front of us, extends on for a number of additional years from where we are today.

[Operator:]

Our next question comes from the line of Nikhil Bhalla with FBR.

[Nikhil Bhalla:]

Ken, I just wanted to get some color on what you think your dry powder capacity is at this point in time for additional acquisitions?

[Kenneth E. Cruse:]

Sure. As Bryan walked through the numbers, we utilized much of our dry powder after the quarter closed with the acquisition of the Boston Park Plaza. We have roughly $65 million of unrestricted cash on the balance sheet and $150 million undrawn revolver. We also have 12 hotels that have no leverage on them. So you can quantify, if we were inclined to take on leverage, investment capacity in the several hundred million range. As we said before, our desired approach in growing our portfolio will be through equity-funded acquisitions where we can acquire hotels at discount to NAV using our equity when it's priced above NAV. And so right now, I think that would be the governing factor in terms of acquisitions rather than balance sheet capacity.

[Nikhil Bhalla:]

Got it. And just following up a little bit more on the issue mentioned with the Hilton reward points, could you just frame the issue for us, a little bit more in terms of how much was your demand actually coming through that in your New York assets? And what exactly is happening? Because of what you think is some weakness ahead?

[Kenneth E. Cruse:]

Sure. So our Hilton, our 2 Hilton properties, we have the Hilton in Times Square, and we have the Doubletree in Times Square. They're both operated by Highgate, and they both run a very high occupancy strategy. They run roughly 98% occupancy throughout the course of the year. Much of the strategy was predicated in the past and in part now continues to be predicated on utilization of HHonors redemptions. And the way that, that works, as you're probably familiar, a loyalist to the Hilton program would build up points, and at a certain point, will redeem those points for hotel nights [ph]. Given the location and the high rate of our hotels in New York, they've always been in the higher categories in terms of redemption requirements. Earlier this year, Hilton changed the program where they more or less devalued the points across the board and came up with new rate categories. The Doubletree Times Square used to be a $50,000 point redemption category. It's moved up to 70,000 during most of the year and then 95,000 points during the remainder of the year. So it ultimately costs a heck of a lot more from the Hilton Honors member to stay in that hotel. As far as the overall percentage of the rooms sold in Q2 of 2012, the Doubletree did roughly 23% of its business, 24% of its business through HHonors redemptions. In 2013, post-change in program, it did roughly 11% of its business. So significant change in the overall business running through the HHonors system. The team has done a very good job of filling up the hotel with high-rated business nonetheless, but that is one component of demand that has changed somewhat. The Hilton Times Square was less pronounced. In fact, you didn't see a material falloff. It was a -- Hilton Honors redemptions was a smaller component of demand. HHonors did roughly 10% of the business, and the Hilton Times Square dropped under roughly 9% this year just on a quarter-over-quarter basis. And Q2 is the only quarter where we have a true valid year-over-year comparison because they just enacted the change.

[Nikhil Bhalla:]

Okay, that's helpful. And just a final question for Marc. You talked about group demand going into next year, you have about 52% of that already on your book. At this point, would you expect that to accelerate given all the renovations that have happened in your portfolio for -- going into next year? Or do you think your pace of demand will pick up over the next few quarters, it's going to be somewhat similar to what it's been in the past?

[Marc A. Hoffman:]

Yes, I think what we would expect is that our non-renovated at the non -- the non-Four-hotel [ph] portfolio, that we would continue to see the acceleration that has occurred over the last year or 2 as we leave behind trough pricing and trough demand, and we would expect the improvements in the Four Hotels we recently renovated to accelerate and see greater demand at those hotels.

[Operator:]

Our next question comes from the line of Jeffrey Donnelly.

[Jeffrey J. Donnelly:]

I got on late, so just maybe a few follow-up questions. Just, Ken, given that we are in something of an extended lodging cycle in your view and maybe because supply growth is low, is it fair to say that you're not expecting -- or you are expecting, I should say, a longer economic cycle than usual and that recession risk will remain low?

[Kenneth E. Cruse:]

Jeff, I think that is a good way to characterize our view. We see this -- look, the recovery thus far from a macroeconomic perspective has been relatively tepid. Jobs are still not where they would otherwise be if you look back at prior cycles, when you're 4 years into recovery. There are a lot of factors that have moderated overall economic growth. We think those very same factors will serve to prolong this recovery and will ultimately prevent the recovery from getting too overheated and will likely result in pushout of any cyclical downturn.

[Jeffrey J. Donnelly:]

And I apologize if you mentioned this on Park Plaza, but do you have an aspirational comp set for that hotel, maybe where you are today and where you'd like to be?

[Kenneth E. Cruse:]

Yes. I think if you look at the comp set today, it is very much the comp set that we expect to be. The difference is we want to pull up the bottom. So our concept today, the Westin Copley Plaza (sic) [Place], the Hilton Back Bay, Marriott Copley Place and Sheraton, where we want to do is we want to bring up the bottom. We are obviously the bottom dragger on that. And if we bring up the bottom, we can see terrific results and a great payback on our investment.

[Jeffrey J. Donnelly:]

When you look ahead, do you think that you can be on par with them from a RevPAR index or you're just trying to narrow that gap?

[Kenneth E. Cruse:]

No. We're just trying to narrow that gap. We don't believe we can be on par with them at all.

[Bryan Albert Giglia:]

I think we'll see an index that we're high relative to the comps and occupancy and slightly lower based on ADR. But Marc is exactly right. Our modeling, which shows being in the low to mid-90s.

[John V. Arabia:]

And we didn't underwrite it that way. We didn't underwrite it assuming that we can get close to 30 million when we started with that group.

[Kenneth E. Cruse:]

That's why we like the opportunity so well.

[Jeffrey J. Donnelly:]

And just one last question. I'm just curious if the brand has given you guys any sort of updated view on the impact of the Affordable Care Act?

[Kenneth E. Cruse:]

So they haven't. Really the information has been fairly limited. I will tell you, we've done some research on our own portfolio on the Affordable Care Act, and one thing that we were able to hang our hat on is that within our portfolio, based on a fairly comprehensive survey, roughly 85% to 90% of our employee base is currently offered health care. And so with that in mind, you've got a wide uptake already on health care benefits. So we see that as representing probably -- meaning that the affordable health care will probably have a fairly limited impact on our overall P&L. Beyond that, we don't have great color from the brands or from anybody else who's been analyzing this. And once again, from our own perspective, we've conducted our own analysis and it does imply, at this point at least, that the impact will not be significant, although it will be noteworthy.

[Operator:]

Ladies and gentlemen, this concludes the Q2 2013 conference call. Thank you for your participation. You may now disconnect.