Sunstone Hotel’s Earnings Call: Expense Growth, Group Demand, and San Diego Outlooks Clash

Date of Call: Aug 6, 2026

Financials Results

• EPS: Adjusted FFO per diluted share of $0.32, up 14% from last year

Guidance:

• REVPAR for all 13 hotels expected to grow between 7% and 9% (midpoint increase of 175 bps to $239-$244).
• Total REVPAR expected to increase between 7% to 9% to a range of $404 to $411.
• Adjusted EBITDA RE expected in the range of $245 million to $255 million.
• FFO per diluted share expected to range from $0.93 to $0.98.
• Full-year capital expenditures estimated at $105 million to $115 million.

Business Commentary:

Revenue Performance and RevPar Growth:

• Sunstone Hotel Investors reported a 9.3% increase in RevPar for the second quarter, with 4.3% growth excluding Ondas Miami Beach.
• The growth was driven by robust leisure demand from increased summer travel and special events, along with sustained strength in group and corporate demand.

Strong Performance in Specific Resorts:

• The company's resorts led the portfolio with combined RevPar growth of nearly 27%, including the benefit of Ondas Miami Beach, and Waialea Beach Resort saw RevPar grow nearly 15%.
• This was attributed to the resorts regaining market position and increased group room night production.

Cost Control and Expense Management:

• The comparable portfolio, excluding Ondas, saw expense growth for all costs increase 4.4% on an absolute basis, or 3.6% per occupied room, leading to a 100 basis point headwind to margins.
• The company focused on driving labor efficiencies and mitigating growth in energy expenses and property-level G&A costs.

Strategic Sale and Capital Recycling:

• Sunstone Hotel Investors sold the Hyatt Regency San Francisco, realizing an attractive private market value.
• The sale was part of a strategy to recycle capital and redeploy proceeds into accretive opportunities, such as the discounted repurchase of common and preferred stock.

Outlook and Guidance Adjustment:

• The company increased its expectations for the year, now expecting RevPar for all 13 hotels in the current portfolio to grow between 7% and 9%.
• This adjustment reflects the outperformance seen in the second quarter and incorporates a modest increase from improved near-term trends while retaining caution.

Sentiment Analysis:

Overall Tone: Positive

• "We were pleased with our performance in the second quarter, which again exceeded our expectations." "The strength of recent trends allows us to incorporate a modest amount of incremental revenue and profitability expectations for the second half of the year in our revised outlook." "Our portfolio benefited from robust leisure demand... which added to sustained strength in group and corporate demand."

Q&A:

• Question from Smedes Rose (Citibank): Could you give high-level thoughts on the pace of property-level expense growth for 2026 and into 2027?
  Response: 2026 total expense growth expected between 3.5% and 4%, moderating to lower end or below in 2027 due to labor normalization and potential insurance/property tax reductions.

• Question from Peter Lasky (Evercore ISI): What are out-of-room spend trends, and why does guidance imply room revenue growth flips relative to total revenue in the second half?
  Response: The flip is driven by San Diego's large hotel having a higher transient mix with lower spend; group strength in the second half and into 2027 will normalize this.

• Question from Patrick Scholes (Truist): Are you seeing financial impact from brand loyalty program changes (Hilton, Marriott), differences between them, and any similar fee relief from Montage or Four Seasons?
  Response: Seeing some cost savings from brand initiatives; both Hilton and Marriott are taking good steps toward efficiency gains; no similar programs heard from luxury brands like Montage or Four Seasons.

• Question from Michael Bellisario (Baird): What are you seeing in investment opportunities and how do you balance capital deployment with closing the valuation discount?
  Response: Transaction volume is up and pricing is improving but still a disconnect; proceeds from San Francisco sale are being used for accretive stock repurchases at a discount to NAV, which is currently the best risk-adjusted return for shareholders.

• Question from Jack Armstrong (Wells Fargo): Can you break out markets and provide group pace numbers for the back half of this year and into 2027?
  Response: Strength is broad-based across urban, convention, and resort hotels; group pace is up double digits in key markets like San Diego, with positive pace into 2027, supported by stronger citywide calendars.

• Question from Michael Hirsch (JP Morgan): Is the implied fourth-quarter EBITDA guidance conservative given strong group pace and outsized contributions from Andaz and San Diego?
  Response: Guidance is reasonable and incorporates some incremental optimism, but remains cautious; Q2 outperformance and strong bookings suggest potential upside if trends continue.

• Question from Chris Darling (Green Street): What's the latest thinking on deploying dry powder for the Montage preferred security given its rising coupon, and what's the relative opportunity in D.C.?
  Response: Montage preferred is an option being evaluated against others; D.C. transient business has improved significantly (pace up 30%), with the hotel gaining share due to brand change and renovation.

Contradiction Point 1

Expense Growth Outlook

Contradiction on the expected rate of expense growth for 2026 and 2027, impacting financial pressure and forecasting.

"Rose (Citibank), what are your thoughts on the recent earnings results?" - Rose (Citibank)

2026Q2: For 2026, total expense growth is expected to be between 3.5% and 4%... - [Brian Giulia](CEO)

How will union contracts and wage hikes impact the pace of expense growth through the remainder of this year and into 2027? - Cooper Clark (Wells Fargo)

20260227-2025 Q4: Total expense growth is expected to be around 3%... - [Bryan Giglia](CEO)

Contradiction Point 2

Group Demand Outlook

Contradiction on group booking trends and the expected pace for the second half of 2026, affecting revenue forecasts.

What were the key factors driving Wells Fargo's financial performance this quarter? - Jack Armstrong (Wells Fargo)

2026Q2: Group pace is up significantly for assets like New Orleans, Orlando, and Washington D.C. - [Bryan Giglia](CEO)

Could you provide market breakdowns and specific group pace numbers for the strong back-half and 2027 outlook? - Smedes Rose (Citi)

2026Q1: While Q1 and Q2 saw weaker group bookings across the portfolio (as expected), the outlook for the second half is strong... - [Bryan Giglia](CEO)

Contradiction Point 3

World Cup Impact Outlook

Contradiction on the measured approach and potential upside from the World Cup event, affecting event-driven revenue expectations.

Michael Hirsch (JP Morgan) - Michael Hirsch (JP Morgan)

2026Q2: The setup for the second half of 2026 is favorable, though the company remains measured due to potential external disruptions. - [Bryan Giglia](CEO)

"Given Q4 represents 22% of full-year EBITDA, is the implied H2 or Q4 guidance conservative?" - Floris van Dijkum (Ladenburg)

2026Q1: A stronger World Cup would provide a significant additional boost to performance, adding to an already positive base... - [Bryan Giglia](CEO)

Contradiction Point 4

Q4 EBITDA Weighting

Contradictory statements on whether the implied Q4 EBITDA share is conservative, affecting quarterly performance expectations.

Michael Hirsch (JP Morgan) - Michael Hirsch (JP Morgan)

2026Q2: The guidance is not considered conservative but is a reasonable, cautious outlook. - [Aaron Reyes](CFO)

Does the EBITDA guidance, implying Q4 is 22% of the full-year with outsized contributions from Andaz and San Diego, suggest conservative H2 or Q4 estimates? - Michael Hirsch (JP Morgan)

2026Q2: This is considered a reasonable expectation based on current trends and business levels. - [Bryan Giglia](CEO)

Contradiction Point 5

San Diego Market Outlook

Outlook shifts from early promise in 2026 to citing "softness" in 2025 and a market-wide issue, affecting specific asset performance expectations.

What were the main factors affecting the company's earnings this quarter? - Peter Lasky (Evercore ISI)

2026Q2: The disconnect between room and total revenue growth is primarily due to San Diego's large hotel having a higher transient mix, which spends less than group customers. - [Brian Giulia](CEO)

What's driving the shift from H1 room revenue growth exceeding total revenue to the flip implied in H2 guidance, and what have you seen in Q3? - Bennett Rose (Citi)

20260227-2025 Q4: San Diego saw some softness in 2025 related to defense contractor government business and international travel. However, transient demand has picked up in the first two months of 2026, showing promise. - [Bryan Giglia](CEO)