Sunstone Hotel Investors Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
August 6, 2025

Key Takeaways

  • Negative Sentiment: Following softer leisure and government demand, Sunstone now expects 2025 RevPAR growth of 3–5% and adjusted EBITDAre of $226M–$240M, trimming its prior guidance.
  • Positive Sentiment: Urban portfolio RevPAR rose over 9% in Q2 with standout growth in Long Beach (+70%), Portland (+10%), and San Francisco (+6.5%), offsetting broader headwinds.
  • Neutral Sentiment: Resort properties faced near-term softness in Wailea and Key West due to price sensitivity and submarket normalization, but improving Kaanapali occupancy and leisure bookings point to a potential Q4 rebound.
  • Neutral Sentiment: Andaz Miami Beach’s delayed opening (May vs. March) drove a Q3 EBITDA loss of $2–3M, yet strong TripAdvisor rankings and booking momentum set it up for robust performance in 2026.
  • Positive Sentiment: The sale of Hilton New Orleans St. Charles at a mid-six percent cap rate funded $100M of share repurchases, contributing $0.03 of FFO per share this year and totaling 14% of shares since 2022.
AI Generated. May Contain Errors.
Earnings Conference Call
Sunstone Hotel Investors Q2 2025
00:00 / 00:00

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Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Sunstone Hotel Investors Second Quarter Earnings Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. I would like to remind everyone that this conference is being recorded today, 08/06/2025, at eleven a.

Operator

M. Eastern Time. I will now turn the presentation over to Mr. Aaron Reyes, Chief Financial Officer. Please go ahead, sir.

Aaron Reyes
Aaron Reyes
EVP & CFO at Sunstone Hotel Investors

Thank you, operator. Before we begin, I would like to remind everyone that this call contains forward looking statements that are subject to risks and uncertainties, including those described in our filings with the SEC, which could cause actual results to differ materially from those projected. We caution you to consider these factors in evaluating our forward looking statements. We also note that the commentary on this call will contain non GAAP financial information, including adjusted EBITDAre, adjusted FFO and hotel adjusted EBITDAre. We are providing this information as a supplement to information prepared in accordance with generally accepted accounting principles.

Aaron Reyes
Aaron Reyes
EVP & CFO at Sunstone Hotel Investors

Additional details on our quarterly results have been provided in our earnings release and supplemental, which are available in the Investor Relations section of our website. With us on the call today are Brian Giulia, Chief Executive Officer and Robert Springer, President and Chief Investment Officer. Brian will start us off by providing some commentary on second quarter operations and recent trends. Afterward, Robert will discuss our capital investment activity. And finally, I will review our second quarter earnings results and provide the details of our updated outlook for 2025.

Aaron Reyes
Aaron Reyes
EVP & CFO at Sunstone Hotel Investors

After our remarks, the team will be available to answer your questions. With that, I would like to turn the call over to Brian. Please go ahead.

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

Thank you, Aaron, and good morning, everyone. The second quarter got off to a noisy start with a tariff announcement in early April coming on the heels of the slowdown in government demand in response to the cost cutting initiatives enacted earlier in the year. While these cross currents led to heightened uncertainty and negatively impacted all demand segments to some degree, we saw pockets of strength across our portfolio that offset these broader headwinds and generated second quarter total portfolio results that were in line to slightly ahead of expectations, albeit with broad variation by market. I'll start by sharing some additional details on our second quarter operations and accretive capital recycling. I'll then discuss the key assumptions underlying our updated outlook for the year, which includes some additional headwinds from a softer leisure demand environment, lower government volumes and a moderated pace of ramp up at Andaz Miami Beach over the next few months.

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

While we are seeing recent signs that give us reasons to be optimistic, we are taking a more cautious approach with fourth quarter expectations given the heightened uncertainty and limited visibility. That said, there are several encouraging signs, especially with recent leisure bookings in Miami and Wailea that if they persist could lead to a better than anticipated fourth quarter. So starting with our quarterly results, our urban hotels led the portfolio growing RevPAR by more than 9% driven by healthy corporate group and business travel demand. Marriott Long Beach Downtown turned in another solid quarter with RevPAR increasing nearly 70% as the property continues to benefit from our recent investment and brand conversion last year. In addition, the Bidwell Marriott Portland saw 10% growth in RevPAR as the hotel is more aggressively competing for business and the market continues to recover.

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

Following a very strong first quarter, JW Marriott New Orleans turned in a sequentially softer but better than expected second quarter. We knew coming into the year that the New Orleans market would have a strong first quarter aided by the Super Bowl and an active citywide calendar, but that the remaining quarters of the year would experience very tough comps. And so while the second quarter RevPAR at our hotel declined from last year, the performance was better than expected and allowed the hotel to gain market share. At our convention hotels, corporate demand remained healthy, but we saw more mixed performance of citywide events across our markets. San Francisco once again surprised to the upside with RevPAR growth of 6.5% and total RevPAR growth of over 16% driven by a better citywide calendar and increased levels of commercial activity in the downtown area.

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

This is the second consecutive quarter where performance has exceeded our expectations and the hotel has ample opportunity to further grow earnings as group pace for the second half of the year and into 2026 is very strong. In Washington DC, our performance was hampered by additional government and government related cancellations and from several citywide events that underperformed across the market. The third quarter is expected to be more challenging than initially anticipated as the market and our hotel continue to feel the impact of weaker contribution from government business and from affiliated events that rely on government funding. In San Antonio, we faced a difficult comparison to last year when we had very strong contribution from in house group business that did not repeat this year. As we move into the third and fourth quarters, we will be completing a renovation of the meeting space, which will cause some short term disruption, but which will better align it with the quality level of the already renovated guest rooms.

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

This hotel has an ideal location within the market and the combination of the updated meeting space, the completion of the Alamo visitor center next door and our ability to reprogram the Riverwalk level to drive additional tenant revenue, all combined to create a compelling opportunity to grow earnings at this hotel in the coming years. In San Diego, occupancy was in line with expectations, but we saw softer conversion of group ancillary spend and some transient rate sensitivity, which contributed to lower top line performance. Alternatively, the Renaissance Orlando at SeaWorld had a strong quarter with good group contribution and solid production. In fact, year to date production is up 16% in room nights and over 30% in revenue as the hotel sales team has been deploying multiple new strategies to book future business. Out of room spend was particularly strong during the quarter with most hotels in the portfolio generating ancillary spend above expectations resulting in total revenue growth coming in 150 basis points higher than room revenue growth in the quarter.

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

Within our resort portfolio, we saw increased price sensitivity at our oceanfront resorts in Wailea and Key West that contributed to lower than expected growth. As we shared with you last quarter, we anticipated that Wailea Beach Resort would have a choppier Q2 and Q3 as all inventory comes back online on the West Side and the island further recovers following the fires. This continues to be our expectation, and we remain of the view that this period of transition as the Kanopali submarket reopens is a needed step and will be a long term positive for the island as it will ultimately bring the return of more guests and drive additional airlift into Maui. Kaanapali is absolutely normalizing and its occupancy is approaching stabilized levels, which will benefit the Wailea Beach Resort. Our updated outlook assumes we face some incremental headwinds in the third quarter with some moderation in the fourth quarter relative to our prior estimates.

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

There are several positives that support an accelerating growth story in the fourth quarter and into 2026. First, the state has allocated marketing funds that will support current and future business. Second, airline capacity is improving, increasing total visitors to the island by 11% compared to 2024. These factors are driving recent increases in weekly transient bookings, which if it continues, should position us better for Q4 and twenty twenty six at one of the largest EBITDA producing properties in our portfolio. In Wine Country, we were pleased with the performance of Montage Heatlesburg and Four Seasons Napa Valley, both of which grew revenues and earnings more than expected.

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

Luxury group and transient travel remained strong at our high end resorts. At Four Seasons, the resort grew occupancy by over 500 basis points and RevPAR by 3.5% despite comping over a strong quarter last year, which benefited from strong buyout activity. Over in Sonoma County, we had a solid quarter with Montage growing occupancy by over 1,200 basis points with a corresponding 18% increase in RevPAR and a 23% increase in total RevPAR. While results at Montage benefited from a favorable tax appeal outcome, even without this impact, the resort grew earnings and margin ahead of our expectations. Year to date, our two wine country resorts increased occupancy by over 700 basis points and grown total RevPAR by over 9%, driven by a combination of more resilient luxury demand and our efforts to better optimize the business mix.

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

As we shared with you on our last call, we opened the On Dazs Miami Beach on May 3. We had previously planned to open the resort in March, allowing us to take advantage of the high demand spring break period, which would have supported strong occupancy from the outset. Missing spring break and opening in the beginning of the low summer season resulted in an EBITDA swing of several million dollars in the second and third quarters as it will take longer to build occupancy, move up in the online ratings, and most importantly, advance our placement on third party booking channels, which is driven by the number of bookings and reviews. While the later opening has also caused us to trim our expectations for the early part of the fourth quarter, the resort is now generating transient bookings near the levels needed to achieve our desired occupancy at year end, which positions the property to be able to deliver on our expectations for 2026. The reviews of the resort have been overwhelmingly positive with TripAdvisor ranking increasing from number 200 out of 212 hotels in Miami Beach to 26 in just three months.

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

Group business is growing quickly with over 1,800 definite room nights on the books for 2026 at a $600 rate and over 2,000 tentative bookings at over $600. 2026 will be a good year in the market with a college football national championship game, F1, and the FIFA World Cup. Robert will share some of the additional steps we are taking to increase the ramp up pace in the interim. While our updated guidance range assumes we will have a noisier next few months leading up to the festive period at year end, we remain confident in our investment thesis and our full focus is on delivering the meaningful multiyear earnings growth that this renovated oceanfront resort can produce. On the capital recycling front, during the quarter, we sold the Hilton New Orleans St.

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

Charles at a mid-eight percent cap rate on last year's earnings or a mid-six percent cap rate including near term CapEx and fully redeployed those proceeds along with additional capital into $100,000,000 of share repurchases this year. The hotel was going to require additional capital investment to maintain its current level of earnings and we anticipated that the resulting yield would be inferior to what we could achieve by reinvesting in our own stock at a compelling discount. So we sold the hotel at an attractive price and did just that. This was a good trade, and it brings the total amount of share repurchases since the start of 2022 to nearly 300,000,000 or nearly 14% of shares outstanding. We recognize that current trading levels would allow for additional accretive share repurchases, and we expect to be thoughtful as we evaluate additional repurchase activity, balancing leverage, diversification, optionality and the evolving return profiles of other potential allocation opportunities.

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

While we saw pockets of strength in the portfolio during the second quarter and earnings came in generally in line with our prior expectations, we are moderating our outlook for the remainder of the year. This is driven primarily by continued weakness in government and government related demand in Washington DC, further softness in Wailea in the third quarter, and a more gradual near term ramp up at Andaz Miami Beach. Wailea and DC are two of our largest hotels. And given the concentrated nature of our portfolio, the short term impact weighs on the company. Looking forward, we believe we have reached the occupancy inflection point in Wailea, and we are seeing transient booking volumes supporting improvement going into the fourth quarter.

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

DC has strong group pace next year that should help lift performance compared to 2025. Miami was slow to get out of the gate, but recent booking velocity, guest reception, and group bookings point to this remarkable resort having a strong 2026. That said, sustained heightened macroeconomic uncertainty, volatility related to recent policy changes and increasingly limited forward visibility have caused many of our operators to take a more conservative view for the second half of the year. While we have reasons to be optimistic that we can work with our hotel teams to drive earnings above the revised projections, we believe it is prudent to recalibrate our outlook based on what we see today. And with that, I'll turn the call over to Robert to give some additional details on our focus areas in Miami and near term capital investments. Robert, please go ahead.

Robert Springer
Robert Springer
President & Chief Investment Officer at Sunstone Hotel Investors

Thanks, Brian. While we are very pleased to have Andaz Miami Beach open and think the renovated resort looks fantastic, we continue to work on multiple fronts to make up for the late opening. Following the resort's debut in early May, there were a few operational items that needed to be addressed, which limited the inventory of available rooms, prolonging our opening time line and slowing the ramp in the initial months. Now that we have addressed these issues, we have a fully functional resort that is gaining momentum into Q4 twenty twenty five and Q1 twenty twenty six, the two most important quarters of the year for the market. Jet's response has been phenomenal, with the resort's TripAdvisor rating increasing meaningfully in the first ninety days. The positive reviews are contributing to a significant increase in transient bookings. To achieve our desired occupancy goals, we need to book approximately 1,000 transient room nights per week. Between May and July, we were averaging around 200 to 300 transient bookings per week.

Robert Springer
Robert Springer
President & Chief Investment Officer at Sunstone Hotel Investors

This makes sense given some of the final work that was going on during the initial weeks after opening. Over the past several weeks, we have been averaging eight to 900 weekly bookings, clearly moving much closer to our desired transient levels. Group has also been a bright spot with premium business booking into Q4 and Q1 next year. Additionally, the College Football National Championship Game and the FIFA World Cup will add compression and boost demand next year. In addition, we now plan to debut our signature dining experience, The Bazaar by Jose Andres, in early twenty twenty six, which should give us further momentum for next year as we expect the restaurant will serve as a dining destination for local residents and guests from nearby hotels.

Robert Springer
Robert Springer
President & Chief Investment Officer at Sunstone Hotel Investors

Elsewhere across the portfolio, we have begun a renovation of the meeting space in San Antonio. We expect to complete this project by year end and that we will have some headwinds in the third quarter while work is performed, which is included in our outlook. In San Diego, we are in the final planning stages for a renovation of the meeting space of our Hilton Bayfront and expect to begin work late in the year. We will complete the meeting space update in phases to minimize disruption. We are starting the planning and budgeting process for our capital investments for next year, and we'll have more to share with you on that topic in the coming quarters.

Robert Springer
Robert Springer
President & Chief Investment Officer at Sunstone Hotel Investors

While the transaction market has been more muted this year, we were pleased with what we were able to achieve on our sale of the Hilton New Orleans St. Charles in June. The heightened uncertainty that has permeated the operating environment since the start of the year has weighed on deal volume, but we were seeing some signs that the bid ask spread is narrowing, which could give way to some additional activity. We continue to seek out opportunities to drive growth and create value through accretive transaction activity, but remain mindful of the returns offered by other capital allocation opportunities. With that, I'll turn it over to Aaron. Please go ahead.

Aaron Reyes
Aaron Reyes
EVP & CFO at Sunstone Hotel Investors

Thanks, Robert. As we noted at the top of the call, our earnings results for the second quarter were generally in line to slightly ahead of our prior expectations, even with only a partial quarter's contribution from the Hilton New Orleans St. Charles, which we sold at the June.

Aaron Reyes
Aaron Reyes
EVP & CFO at Sunstone Hotel Investors

Stronger ancillary spend more than offset lighter rooms revenue growth and helped to mitigate margin pressure. Second quarter RevPAR increased 2.2% compared to last year and total RevPAR grew 3.7%. Adjusted EBITDAre in the second quarter was $73,000,000 and adjusted FFO was $0.28 per diluted share. We continue to benefit from a strong balance sheet with net leverage of only 3.5 times trailing earnings or 4.8 times including our preferred equity. While our outlook has moderated, we still expect our leverage and balance sheet capacity to improve as we benefit from the embedded growth in the portfolio.

Aaron Reyes
Aaron Reyes
EVP & CFO at Sunstone Hotel Investors

As of the end of the quarter, we had nearly $145,000,000 of total cash and cash equivalents including our restricted cash. Together with capacity on our credit facility, this equates to over $600,000,000 of total liquidity. Inclusive of the extension options available to us, we don't have any debt maturities for the remainder of the year, but we are in discussions with our bank group to address our twenty twenty six maturities and extend the majority of our in place debt. We will have more details to share with you in the coming months as those details are finalized. Included in this morning's earnings release are the details of our updated outlook for 2025.

Aaron Reyes
Aaron Reyes
EVP & CFO at Sunstone Hotel Investors

Our projections have been adjusted for the midyear sale of the Hilton New Orleans St. Charles and as Brian noted earlier, reflect a more cautious expectation for the remainder of the year. Based on what we see today, we expect that our total portfolio RevPAR growth will range from 3% to 5% as compared to 2024. This range reflects our revised outlook for ONDOS Miami Beach, including a moderated pace of ramp up relative to what we assumed in our prior outlook. For the balance of the portfolio, excluding ONDAS, we now anticipate that RevPAR will increase between 13%.

Aaron Reyes
Aaron Reyes
EVP & CFO at Sunstone Hotel Investors

As a point of reference for these updated guidance ranges, the 2024 RevPAR statistics for the total portfolio and for the comparable portfolio excluding ONDOS Miami Beach were $216.86 and $225.31 respectively. With these revised top line growth projections, we now estimate that full year adjusted EBITDAre will range from $226,000,000 to $240,000,000 and our adjusted FFO per diluted share will range from $0.80 to $0.87 As it relates to some of the quarterly assumptions that comprise our updated full year outlook, we would expect our total portfolio RevPAR growth to be flat to slightly positive in the third quarter before increasing more meaningfully in the fourth quarter, driven by greater contribution from Andaz Miami Beach, ongoing growth in Long Beach and the easier comparison for the impact of the strike in San Diego. In terms of the distribution of our EBITDA by quarter, based on the midpoint of our revised outlook, the first half of the year contributed approximately 56% of our expected full year total, and we expect the third quarter to contribute approximately 20% to 21% with the balance coming in the fourth quarter. Included in this distribution is the assumption that Andaz Miami Beach generates an EBITDA loss of 2,000,000 to $3,000,000 in the third quarter as it remains a low season in the market.

Aaron Reyes
Aaron Reyes
EVP & CFO at Sunstone Hotel Investors

While profitability at the resort will begin to accelerate as we move into the higher demand fourth quarter, we expect that the EBITDA losses generated prior to the resort's opening in May and during the slower summer months since that time will cause its cumulative performance to be a slight headwind to full year total portfolio earnings. As we noted in the 2025 outlook section of our press release, the remaining components of our full year projections remain generally consistent with our expectations from the prior quarter. Now shifting to our return of capital. So far this year, we have repurchased more than 11,000,000 shares. Based on the midpoint of our updated range, our share repurchase activity will contribute $03 per share of additional FFO this year.

Aaron Reyes
Aaron Reyes
EVP & CFO at Sunstone Hotel Investors

On a full year run rate basis, this would equate to more than 6% accretion in earnings per share. While we retain capacity for additional share repurchases, our updated projections do not assume the benefit of additional buyback activity. Separate from our share repurchases, our Board of Directors has authorized a $09 per share common dividend for the third quarter and has also declared the routine distributions for our Series H and I preferred securities. And with that, we can now open the call to questions. So that we are able to speak with as many participants as possible, we ask that you please limit yourself to one question. Operator, please go ahead.

Operator

Your first question comes from the line of Duane Pfennigwerth with Evercore ISI. Please go ahead.

Analyst

Yeah. Hi. This is Peter on for Duane. Thanks for taking the question. So we appreciate kind of the context you provided about Maui and the different submarkets. But could you just elaborate on what you're seeing regarding the recent booking trends? You said maybe it has ticked up a little bit recently. And what could be driving that? And then just to add on, have you quantified what the room renovation impact is at the hotel and when that renovation will be wrapped up? Thanks.

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

Morning, Peter. Okay. So starting with with the the market recovery in Maui. And and as you've heard on on some of the other calls, when you look you have to look at the submarket. So you look at Wailea where the our Wailea Beach Resort is in, and then you look at Kaanapali, the West side of the island, that has been recovering from the fires.

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

When you our hotel competes in both markets. So we we compete with the highest end of the Kannapali market, and then we compete with the luxury of the Wailea submarket. Kannapali has been recovering. And as of recently, it's it's moved up from, call it, 50 ish percent occupancy to closer to 70%. And so with the success of that market, then bring stability in their rate, which then brings the differential between their rate and our rate closer, which then allows us to to grow our our occupancy because we're no longer losing discounted rooms to that to that market.

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

So when you look at Kannapali, the success of Kannapali is gonna be translating into the success of of Wailea. They have had we always knew that we were gonna lag that. And so as that market now reaches stabilization, it's our turn to grow. And so what we saw is as that as kind of probably got closer to the 70 ish percent occupancy, our leisure and we look at this sort of weekly leisure bookings started to accelerate in, you know, in the July and going into August. So as we saw that those transient rooms booking into the next six months, our transient index recently has grown dramatically.

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

So we're we were you know, have gone from a 102 index from an 84 index. And so also against the luxury set and YLA, we're growing there too. And so as we you know, because the lead time booking into Hawaii is a is a bit longer than other markets, we're just q three won't see a lot of that, but we are seeing that happening into q four. And so when we look at the impact of of Wailea, a big piece of it was in q three where where we just did not get to the the transient volumes that we were expecting. Q four has better group base in it.

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

It's a better group quarter. And combining that with the with the additional, transient bookings give us more confidence that, q four is is trending up. Now if the bookings we see right now for the last few weeks continue, there could be some upside there. But until until we get a couple more weeks of that under our belt, I think that, you know, we're we're confident things are moving in the right direction, and hopefully, we'll continue to see, that growth. The renovation is complete.

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

It was done towards the end of last year and into the beginning of this year. And so not only are we we benefiting from, you know, growth in the market, but now we have a new product to sell also.

Analyst

Thank you.

Operator

Your next question comes from the line of Doc Armstrong with Wells Fargo. Please go ahead. Your next question comes from the line of Dani Assad with Bank of America. Please go ahead.

Dany Asad
Dany Asad
Director at Bank of America

Hey, good morning. Good morning, guys. So if maybe just in your prepared remarks, Aaron, you were talking about the change and the revision in outlook. Can you I believe last quarter we were looking at a nominal contribution from ANDAs, right? And now we're talking about a moderate headwind.

Dany Asad
Dany Asad
Director at Bank of America

So can you just maybe bucket that change in outlook, the $12,500,000 EBITDA reduction? How much of that is coming directly from the change in Hondas? How much of that maybe is coming from DC? How much is coming from Wailea? And if there's any other moving pieces, that would be really helpful. Thank you.

Aaron Reyes
Aaron Reyes
EVP & CFO at Sunstone Hotel Investors

Yes. Sure, Danny. This is Darren. Thanks for the question. Yeah.

Aaron Reyes
Aaron Reyes
EVP & CFO at Sunstone Hotel Investors

So as as we think about just the evolution of the midpoint of the guidance range from last quarter to this quarter, you know, based on what we shared in the prepared commentary, you know, certainly a piece of that is the softness that we're seeing in Wailea as the other side of the island continues to normalize. You know, as as Brian alluded to, that is absolutely happening. And for this commentary that you may have heard from some of our peers that do, you know, own own hotels over on the West Side, it's evident in the in the trends that they're seeing. So so that's a long term good thing for the island, but it is causing some, you know, some choppiness in the middle part of this year. And so that'll contribute to a portion of the revision.

Aaron Reyes
Aaron Reyes
EVP & CFO at Sunstone Hotel Investors

Among the comparable portfolio, the other piece is is gonna be DC and just what we're seeing on the the softer, direct government business and then also some of the what we call government adjacent business, you know, which relies on government funding, which is, you know, which was also been challenged here more recently. So if you put those two together, DC and YLA, you know, they are larger contributors for us, and that's about a third of the total guidance provision and the contribution of those two hotels. The other part is the later start in the year at Andaz, you which is causing the near term ramp to be, you know, slower than our expectations. You know, as we alluded to, we're certainly starting to see, the momentum and attraction that we wanna see to position us to to get to where we need to be at the end of year at the end of the year so that we have a successful 2026. But the expectation now for 2025 from OnDaz is that it will be a slight headwind, from an overall earnings perspective this year, and that makes up about the other two thirds or so of the of the change in the EBITDA and FFO revision.

Aaron Reyes
Aaron Reyes
EVP & CFO at Sunstone Hotel Investors

Across the rest of the portfolio, we've had some puts and takes that kind of largely offset each other. Certainly, some strength in San Francisco, which has spilled over into the wine country, which is looking for a higher full year number than what we had before, and that's offsetting some of the other changes across the balance of the portfolio.

Dany Asad
Dany Asad
Director at Bank of America

Okay. Thank you very much.

Operator

The next question comes from the line of David Katz with Jefferies. Please go ahead.

David Katz
David Katz
Managing Director at Jefferies

Hi, morning everybody. Thanks for taking my question. Just noting some of the commentary about repurchases. How do you sort of think about a range of comfortable leverage? And how do you think about kind of those buybacks ongoing, right?

David Katz
David Katz
Managing Director at Jefferies

I mean, in the context of not just your stock, but many of your peers are below historical ranges, and I don't know that there's any valid argument that they're appropriately priced. I guess what I'm getting at is, you know, how much what's your tolerance to buy back more than what you have?

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

Sure. Good morning, David. You know, look, we continue to employ a a balanced approach to to capital allocation and with that capital recycling. We have, you know, repurchased, I think based on our market cap or our overall size, one of the larger amounts of of stock over the last several years. So we're we're absolutely, you know, not shy about about doing that.

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

And and your question on leverage is is the right way to look at it is is that right now our leverage, you know, is gives us ample capacity and ample room to increase leverage, and we could probably increase leverage a turn and still stay within our range that, you know, we we believe is necessary. And I think over time, we've said this kind of four to five times, you know, debt to EBITDA to be able to, you know, withstand any sort of of economics, you know, cyclical ups ups and downs that our space always sees. So we feel the best way to to allocate capital going forward right now is to is through recycling as we did with New Orleans, and we took an asset that, you know, we sold at a call it an eight cap on '25 or eight ish cap on '25 without any of the capital that we needed to put into it in a much lower cap rate with that capital and redeployed it into our our stock, which is trading at a higher cap rate. And quite frankly, you know, while New Orleans was a fine hotel, the our remaining portfolio is a is a much better quality.

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

And so we'll we'll continue to to do that. And every time that there is capital to deploy, we we look at what the options are on a risk adjusted basis. And and, you know, to your point, it it's a pretty clear choice right now where assets, the limited number of assets that are trading, where they're trading in the market. And and that spread the bid ask spread has has come in a bit, but probably has some more way to go before it is competitive with share repurchase where stock is right now. And so, you know, that it it it is it's always a balance of of leverage and and capacity and and other opportunities.

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

But I think in the near term, you know, whether it's using our using our balance sheet or trying to recycle additional assets where we can arbitrage, private market valuations, right, we'll continue to do that.

David Katz
David Katz
Managing Director at Jefferies

Okay. Fair enough. Thanks very much.

Operator

Your next question comes from the line of Daniel Hogan with Baird. Please go ahead.

Daniel Hogan
Equity Research Associate at Robert W. Baird & Co

Hi, good morning. Thanks for taking my question. Just quickly more broadly on group. For '26, what's the total pace? And then aside from the positive comments for the DC outlook, are there any other markets that are looking incrementally better or worse for next year?

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

Sure. Hey, Dan. So we haven't given pace for '26 yet other than saying it's, you know, it's up, you know, at this point, kind of the low single digit range. We look at at citywide activity for '26 and then also looking into '27, in '26, DC, Miami, and New Orleans are are the stronger markets in '20 into '27. Boston, San Diego, DC, and Portland are all up.

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

So, you know, again, looking at our our portfolio, you know, some of our larger assets have have some good head so we can tell what's going to the next couple of years. San Francisco is also is also looking good. And when we look at our own internal pace in San Francisco, because the hotel does do a lot of just in house business as opposed to citywide, Our pace is very strong for San Francisco. So our expectation is, you know, what we're seeing this year, we'll continue to see that growth in San Francisco. And then also moving a little bit north up into the wine country. We expect good good growth in that market also.

Daniel Hogan
Equity Research Associate at Robert W. Baird & Co

Alright. Thank you very much.

Operator

Your next question comes from the line of Smedes Rose with Citigroup.

Smedes Rose
Smedes Rose
Director at Citigroup

Just two just quick ones here. Could you are you still comfortable that Andaz can reach kind of high teens to $20,000,000 of EBITDA contribution for full year 2026? And then Brian, could you just isolate what the impact what the positive impact the montage was from the real estate or the tax refund that you mentioned?

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

Sure. Morning, Smedes. For Montage, it is about a million dollars of the of the positive. So even without that, the hotel is up materially about a million dollars quarter over quarter. And that really points to, when you look at both wine country assets, luxury leisure travelers still very strong.

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

Four Seasons had an excellent quarter on the transient side. Montage, which is the of the two, the more meaningful group house, had a fantastic reporter. So, you know, both both hotels, both resorts have, you know, are growing continuing to grow EBITDA this year and have room to con continue to grow as we move forward. And and we're, you know, we're very optimistic of of next year. With ONDAS, you know, looking at you know, just kinda looking at the fourth quarter, our expectations and knowing that we are hitting or expect to hit the occupancies that we were planning on for the fourth quarter, although starting off later in the year and having to ramp up in the in the seasonally low third quarter, you know, has led us to a slightly lower rate for the for the fourth quarter.

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

So that is, you know, while we're we're gonna expect to hit the occupancy, we were we're planning on the rate will be lower. The market rate is actually higher than what we were expecting and what we had underwritten. So, you know, moving forward, yes, we think that there is absolutely you know, while fourth quarter will be, you know, solid for us this year, next year, we expect a lot more growth. Fourth quarter is typically, you know, 20 to 25% of the annual EBITDA. First quarter is about 40% of the EBITDA.

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

So looking at our EBITDA expectations for the fourth quarter, you know, I think, you know, our our original expectation that we had was that the hotel would do 6 to 8,000,000 of EBITDA this year and then growing next year, you know, doubling and then moving, into '27 till to hit stabilization. Yes. We we we are confident of our of our growth next year. You know, given the the start and and some of the challenges we've had leading up to that, we're expecting to be at the lower end of that, but still within that, you know, range.

Operator

Thank you. Your next question comes from the line of Dan Politzer with JPMorgan. Please go ahead.

Daniel Politzer
Daniel Politzer
Executive Director, Equity Research - Gaming and Lodging at JP Morgan

Hey, good morning everyone. Thanks for taking my question. Just a quick one on San Francisco, you guys mentioned that things seem to be getting better. I think said it was the second consecutive quarter to exceed your expectations. I mean, I recognize that this is coming off a pretty low base here, but what is it that you're seeing there?

Daniel Politzer
Daniel Politzer
Executive Director, Equity Research - Gaming and Lodging at JP Morgan

And do you feel like there's more substance to this or more of a glide path going forward? Or are we really just still kind of bumping along the bottom there? Thanks.

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

You know, I I think we're we're definitely coming. I mean, we've definitely come off the bottom. There's a long way to go in San Francisco. And so some of the things that our hotel is benefiting from is, one, is is the ability to do in house group and have meaningful meeting space. That's that's been an important, you know, way that the hotel has been able to grow and and outpace different submarkets.

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

I I think that the location of the hotel, while in the past, Union Square would have been the first choice, you know, even for midweek business travel, Embarcadero is is definitely up there and and and the first choice now going going forward. And so looking at the office space proximate to us, you know, technology and and and AI and other and other investment is is, you know, continuing to grow in that market. Our ability to, you know, place in house group to be able to layer the the demands of the of the hotel, and then also, you know, having a newly renovated guest room and and and having that in a market where, you know, some capital has, you know, been been deferred and delayed over the last few years. It positions the hotel well. And then when you look at the greater San Francisco market, you know, the citywides have a long way to go, but they are growing.

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

The the administration and the the the local government is focused on fixing a lot of the the issues from the past. And when you look at the the overall, you know, surrounding and and safety and and and that is definitely improving, You know, maybe more so in Embarcadero than in in Union Square early on, but but that's something that I think long term, the city is is pointed in the right direction, and has, you know, has made some major steps, especially, you know, securing some of the the larger citywides than the past it had lost, others. So, you know, I I think there's a lot of positives in San Francisco. But to your point, it, you know, it had it was one of the markets that had fallen the most, and it has the longest way to go. But we definitely see a multiyear lift in this market, and and think that our hotel has the right composition of meeting space and the right location and the right room product to be able to to grow with it and and have several years of of additional, you know, earnings and and top line growth.

Daniel Politzer
Daniel Politzer
Executive Director, Equity Research - Gaming and Lodging at JP Morgan

Got it. Thank you. And then maybe just for my follow-up, a more high level question. I think you touched on your capital allocation priorities or strategy there. I guess asked a different way, you sold the Hilton St.

Daniel Politzer
Daniel Politzer
Executive Director, Equity Research - Gaming and Lodging at JP Morgan

Charles, you redeployed that to buying back your stock. As we think about the next twelve call it twenty four months, do you see yourself as more likely a buyer or seller of assets, hard assets and how along with that more likely or less likely to be a big buyer of your stock here? Thanks.

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

Sure. You know, answer is is is it depends. You know, first of all, in the transaction market, there have not been a lot of transactions. Transaction volume is down considerably. And, you know, while refinancing and and debt capacity is is definitely there, you know, whether it's the REITs or the private buyers.

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

The equity has been a little bit more scarce. And so, you know, New Orleans was the right size of a of an asset and transaction, and and it was a, you know, good opportunity for us to redeploy into our own stock and and use a little bit of our balance sheet too to redeploy into our own stock. Going forward, I I think given the current environment, you know, it's probably more likely that we would be a seller than a a buyer, but things can move really quickly. And and our our view is that we will look to capital recycle. So if we look to sell a hotel, then it's the following that, we we evaluate what the opportunities are out there.

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

And in the spot market right now, yeah, the it's it's hard to imagine a an acquisition, would be a meaningful, would on a risk adjusted basis, we would provide a meaningful return over the repurchase of our stock. But things change. I mean, you go back in time and, you know, we were buying back shares and then stocks moved and we were able to find a good deal on the market and we acquired San Antonio. And then things changed again, and we went back and and repurchased shares. So when you have a, you know, when you have a smaller concentrated portfolio like ours, it gives you the ability to pivot and and move in and out pretty quickly, which I think we've demonstrated over time.

Daniel Politzer
Daniel Politzer
Executive Director, Equity Research - Gaming and Lodging at JP Morgan

Got it. Thank you so much.

Operator

And your next question comes from the line of Chris Darling with Green Street. Please go ahead.

Chris Darling
Senior Analyst at Green Street Advisors, LLC

Thank you. Good morning. Brian, I believe you mentioned relative strengths in Orlando in your prepared remarks. Can you elaborate on what you're seeing there, the outlook for that property through the rest of this year? And then do you have any updated thoughts on, you know, repositioning or perhaps densifying that property over time?

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

Sure. Yeah. You know, look, our our location has improved recently with the opening of the new Universal Park, is a mile and a half, two miles from the hotel. And so while we we sit directly across from SeaWorld, the other two generators of of leisure traffic in in the market were kinda equal distant from those, which makes us not as convenient for any of you know, either Universal or Disney. Having the new Universal Park close to us is is a major plus.

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

And and when the hotel is looking to you know, when they looked at their strategy this year, one of one of those you know, one of the opportunities was to increase transient bookings. And this is a hotel that has always done well on the group side, has, you know, very good meeting space per available room, and has always just been a a very, very strong group house. And so when we we've expanded the the focus on on transient, and we've also looked at other other, you know, segments of group, not just corporate, but but other segments to fill shoulder time periods. And I think that that's one area where the hotel has been very successful. It has had a phenomenal production year so far where it's put more group room nights on the books for, you know, this year, next year, and and following years, than it had in in, you know, the last five or six years.

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

And so I I think, you know, part of it is is just looking and and looking at different different, you know, types of group business to go after. And then I think the other part of it is is leveraging its improving location for more leisure transient.

Chris Darling
Senior Analyst at Green Street Advisors, LLC

I appreciate the thoughts.

Operator

The next question comes from the line of Jack Armstrong with Wells Fargo. Please go ahead.

Jack Armstrong
Jack Armstrong
Equity Research Associate at Wells Fargo

Hey. Good morning. Thanks for taking the question. Your view, at what point does the size of the company become a hurdle for potential investors? As we're thinking about your ability to set yourself up for earnings growth with acquisitions seemingly off the table at this point, where can you invest in the existing portfolio? How should we be thinking about CapEx in 2026?

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

Okay. Great. So first is where yeah. Let me let me start with the second one, and I'll move to the first. So where can we invest in the portfolio for earnings growth?

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

The good news is we've already been investing in the portfolio. And so the growth we're seeing this year in the repositioning of Long Beach, you know, while it's a it's a market that does do some government business, and has been, you know, maybe hampered by that a little bit, its year over year growth is still fantastic and growth, you know, prior to renovation indexes. All those are moving in the right direction. So there there's a place where we've invested in. Wailea, we we updated the rooms last year and the beginning of this year.

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

And so now is that is our turn for growth and and the hotel the resort has a has a, you know, good path ahead of it, we're able to capitalize on on that investment. DC, a challenged market right now, but when you look at the repositioning we did and where that where that hotel is is performing on a relative basis to its market in transient occupancy and rate, the reflagging of that absolutely, you know, is is paying off and and made a big difference. And then some of the existing portfolio that has lagged, like San Francisco, will should continue to give us, growth going forward. And then on DAS will be kicking in, you know, into the third, mainly fourth quarter, and then into next year. So there, you know, there is growth already there, that will that will create to us, into '26 and to '27.

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

You know, we we have invested in our portfolio. When you look at where the cyclical rooms renovations are coming up, Orlando will be the is the next, where we have a you know, we'll have a renovation, and and we'll evaluate that. And as we get into next year, we'll we'll have more information on the timing of that. But even, like, smaller renovations that we that Robert talked about and, you know, the meeting space in in San Diego, which is a, you know, very big group box. So updating that meeting space is something that's very important to the success and growth of that hotel.

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

And so those things are all in the works or, you know, we have queued up or or have already put in to be able to produce future growth. As far as the size of the company, you know, look, I guess you can look at it a couple ways. From a from a market cap perspective, we're, you know, we're within the range of of our peers. On a hotel count, we're at the lower end. Are there others with less hotels than us? Yes.

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

But, you know, we have we have a concentrated portfolio. We have a concentrated portfolio with with great assets. You know, you're gonna be at the whims whim of of markets from here to there where we're seeing with DC. But, you know, as far you know, looking long term, do you wanna have 20 plus acres in in Wailea? Is that a concentration that you can, you know, be happy with?

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

I I think so. But, you know, to your point, you know, can you sell assets and and repurchase shares forever? I guess, yes, you can, but, you know, that would bring an end at some point. You know, I I think our our focus is more of just, you know, benefiting from our our in our ability to be nimble. And so, you know, does that require, you know, multiple asset sales and multiple acquisitions a year or no?

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

It it could be, you know, one or one or two could be meaningful. And so looking going forward, you know, we we recycled New Orleans, and that went into stock because that made the most sense at that time. Going forward, our next disposition, we do we'll evaluate. And at some point, it will you know, at least if history repeats itself at some point, it will make sense to acquire assets, and we'll look to do that accretively. Until then, you know, this is why we have the balance sheet that we do.

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

We can redeploy into our own, you know, stock and, you know, create NAV and FFO per share growth that way. So I I I think we have we have multiple avenues, you know, at our disposal. We have the balance sheet to do it, and we we have the size right now where we we can continue to go along this path and and and execute.

Jack Armstrong
Jack Armstrong
Equity Research Associate at Wells Fargo

Great. Thank you.

Operator

Our last question comes from the line of Chris Woronka with Deutsche Bank. Please go ahead.

Chris Woronka
Chris Woronka
Senior Analyst - Hotel / Lodging REITs & Leisure at Deutsche Bank

Hey, guys. Good morning. Thanks for taking the question. If we could maybe revisit, morning, Brian. If we could maybe revisit, On Dogg's Miami Beach for for a moment.

Chris Woronka
Chris Woronka
Senior Analyst - Hotel / Lodging REITs & Leisure at Deutsche Bank

Yeah. I I assume you guys expect that's gonna be a high redemption hotel. And I'm I'm just curious as to whether there's any changes we need to think about, you know, in terms of if if there are fewer or greater redemptions. You know, is that is that something that could ultimately impact your your underwriting or your, you know, your expectations for for EBITDA generation? Thanks.

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

No. I mean morning, Chris. So but redemptions are are you know, depending on the type of hotel, can be a very meaningful and important piece of of the, you know, the segmentation. And and quite frankly, a resort like this is why, you know, why loyalty programs exist. So, you know, the the, you know, members can use them at these highly desirable locations, and that's why they store up points and get points.

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

And so, yeah, we have a lot of we have a lot of experience and a lot of history with some high redemption hotels going all the way back to, you know, our days with the Doubletree, but Wailea, you know, New Orleans, Boston, Long Wharf, you know, is a is a big redemption hotel, especially for, you know, the it's leisure traveler. So we always expected this to be a a, you know, a strong redemption hotel or resort. In in Florida, in in the Hyatt system. It's one of the, you know you know, premier options. So we expected early on and and as and we saw early on very good redemptions.

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

We expect redemptions to continue to be, you know, ongoing, a major part of the segmentation of this hotel. And and with that, you you manage around it based on the the rules and and and the redemption the way the redemptions work within the system, which, quite frankly, change year over year over year. And so we use it as a as a as a piece of the segmentation, and it it's something that, you know, helps at times compress the hotel and drive rate higher, especially in high demand periods. But it's something that we expected. Maybe we're seeing a little bit more than we thought, and I think that just speaks to the quality of the hotel.

Chris Woronka
Chris Woronka
Senior Analyst - Hotel / Lodging REITs & Leisure at Deutsche Bank

Okay. Gotcha. Thanks, Brian.

Operator

Our last question comes from the line of Logan Epstein with Wolfe Research. Please go ahead.

Logan Epstein
Equity Research Associate at Wolfe Research

Thanks for taking the question. I was going to talk ask a question on how you guys are thinking about giving up rate to get occupancy in the door given several of the top performing assets in the quarter were on weaker rate but much stronger occupancy?

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

Yeah. Morning, Logan. It the answer is it depends on the hotel. And so I'll give you a couple examples. So so when we opened up in in q three in in Miami, q three is a seasonally low quarter.

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

It's about produces about 8% of the EBITDA for the year on average for that market. And so as you're trying to build occupancy, yes, you're gonna have to you're gonna have to sacrifice some rate to do that. We were catching up to the market, so that was expected. We were, you know, we were hopeful to be opening in spring during spring break where it was higher compression. That would have been an easier thing to do, but, yes, you do that.

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

Other places where you could see rate going down, wine country, part of that is getting the segmentation of the resort right. So you want more group business. Our group will tend to come in at a lower rate than transient, but also comes with, you know, between the montage and the four seasons, 800 to a thousand dollars a night per night per room of ancillary spend. So, you know, in in in resorts like that, like Wailea, like Andaz, total RevPAR is very important. So you can give up some rates to bring in better, you know, group business that, you know, uses your banquets and and all the other services of the hotel and get you to a higher total RevPAR.

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

So, you know, you have to balance that at each hotel, and and that's, you know, you know, that's why you'll see at certain times occupancy going up and rate going down. It's usually a shift in the in the segmentation.

Logan Epstein
Equity Research Associate at Wolfe Research

Thanks, Brent.

Operator

I will now turn the call over to Brian Gillia for closing remarks. Please go ahead.

Bryan Giglia
Bryan Giglia
CEO & Director at Sunstone Hotel Investors

Thank you everyone for your time and interest in the company. We look forward to meeting with many of you at upcoming conferences and, look forward to, walking, many of you through the, the Andals Miami Beach, when we have the opportunity over the coming months. Thank you.

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect.

Executives
    • Aaron Reyes
      Aaron Reyes
      EVP & CFO
    • Bryan Giglia
      Bryan Giglia
      CEO & Director
    • Robert Springer
      Robert Springer
      President & Chief Investment Officer
Analysts
    • Analyst
    • Dany Asad
      Director at Bank of America
    • David Katz
      Managing Director at Jefferies
    • Daniel Hogan
      Equity Research Associate at Robert W. Baird & Co
    • Smedes Rose
      Director at Citigroup
    • Daniel Politzer
      Executive Director, Equity Research - Gaming and Lodging at JP Morgan
    • Chris Darling
      Senior Analyst at Green Street Advisors, LLC
    • Jack Armstrong
      Equity Research Associate at Wells Fargo
    • Chris Woronka
      Senior Analyst - Hotel / Lodging REITs & Leisure at Deutsche Bank
    • Logan Epstein
      Equity Research Associate at Wolfe Research
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