Aaron Reyes – Vice President, Corporate Finance Bryan Giglia – Chief Financial Officer John Arabia – President & Chief Executive Officer Marc Hoffman – Chief Operating Officer.

Ryan Meliker – Canaccord Genuity Jeff Donnelly – Wells Fargo David Loeb – Baird Bill Crow – Raymond James Anthony Powell – Barclays Shaun Kelley – Bank of America Lukas Hartwich – Green Street Advisors Smedes Rose – Citi Thomas Allen – Morgan Stanley Rich Hightower – Evercore ISI Bryan Mayer – FBR.

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Sunstone Hotel Investors' Third Quarter Conference Call. At this time, all participants are in 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, Wednesday, November 2, 2016, at 9:00 AM Pacific Daylight Time. I will now turn the presentation over to Mr. Aaron Reyes, Vice President of Corporate Finance. Please go ahead, sir..

Thank you, Leo and good morning everyone. By now, you should have all received a copy of our third quarter earnings release and supplemental which were released yesterday. If you do not yet have a copy, you can access them on our website.

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 prospectuses, 10-Qs, 10-Ks, and other filings with the SEC, which could cause actual results to differ materially from those projected.

We caution you to consider those factors in evaluating our forward-looking statements. We also note that this call may contain non-GAAP financial information, including adjusted EBITDA, adjusted FFO, and hotel adjusted 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 John Arabia, President and Chief Executive Officer; Bryan Giglia, Chief Financial Officer; and Marc Hoffman, Chief Operating Officer.

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

Good morning, everyone, and thank you for joining us. Today, I will provide an overview of our recent operating results, discuss our views on the operating environment, update you on our recently or nearly completed redevelopment projects and finally provide commentary in the current investment environment.

Later, Bryan will provide an overview of our balance sheet and updated earnings guidance. Third quarter operating results which included comparable hotel RevPAR growth of 2.2% and total portfolio RevPAR growth of 90 basis points came in near the midpoint of our expectations.

Despite the relatively anemic top line growth, our total portfolio hotel level EBITDA increased by nearly 2% in the quarter as property level operating expenses increased only 70 basis points compared to the third quarter of 2015 aided by a reduction in both, energy expenses and property taxes.

Furthermore, our third quarter adjusted EBITDA and adjusted FFO per share exceeded the top end of our guidance as a result of the modest property level expense growth, as well as lower than expected corporate overhead.

Overall, the operating environment in the third quarter was impacted by many of the same headwinds we experienced in the first half of the year.

The muted outlook for macroeconomic growth including low expectations for business investment and corporate revenue growth have contributed to ongoing weakness in travel demand for corporate accounts, particularly those in the banking, financial services, and the oil and gas industries.

During the third quarter our total portfolio average daily rate increased 60 basis points despite a 40 basis points increase in occupancy to a third quarter near record occupancy level of 85.8%.

Our operators continue to have difficulties pushing room rates despite high occupancy levels and those that have tried to maintain our push rates in non-sold out periods have ended up losing occupancy index to their competitive hotels.

We continue to believe that the difficulty in pushing room rates is result of both, economic headwinds and industry dynamics such as the increase in information to both the consumer and the operator, the free optionality provided to consumer when they book a room reservation, and the perverse incentive created by several frequent guest programs that resulted in a last minute discounting in order to achieve certain occupancy threshold.

As a result of this economic and industry specific factors our portfolio witnessed a 1.2% decline in transient room rates in the quarter, and a 1% decline in transient ADR. Markets saw weak transit demand including Chicago, New Orleans, Houston and New York.

Alternatively, transient demand was healthy at our hotels in Washington DC, Baltimore, Philadelphia, Park City, Long Beach and LAX. Now let's talk a bit about our portfolio group trends.

Our transient revenues in the quarter we are challenged in several markets, we once again were more encouraged by the performance of our group business which makes up about third of our total room rates.

Group room rates increased 4.1% relative to the prior year and average group rates increased approximately 4.8% which combined to generate a robust 9% group revenue growth for the quarter. Group trends were particularly positive in San Diego, Orlando, and Baltimore.

As we discussed on the call last quarter, our third quarter guidance assumed that actualized group rooms as a percentage of group blocks would be lower than the historic norm. The third quarter group slip percentage of 83.2% was in fact lower than the third quarter norm of 84% to 86%.

However, this figure exceeded our internal forecast and our assumption underlying guidance.

As Bryan will discuss in a minute, our internal forecast and guidance will continue to assume the group slippage levels will fall short of historic norms as a result of the relatively weak economic environment and the near-term group bookings are likely to remain soft.

During the third quarter our hotels actualized more than 337,000 group room nights which is a record for the period. Our group pays for the full year has moderated our current full year forecast of achieving nearly 1.4 million group rooms would also be a record for the portfolio.

As of the end of the third quarter, we had 94% of our forecasted full year group rooms on the books which is approximately 90 basis point ahead of the same time last year. As the beginning of the fourth quarter, full year group pace was up 3.9% with largest contributors being the San Diego Bayfront and the Renaissance Orlando.

While longer term group bookings remain healthy, near-term group bookings, particularly from corporate clients have moderated. This is a trend that attribute not only to the previously mentioned economic headwinds but also the fact that several of our hotels have limited remaining availability for groups these year.

Turning to margins; during the third quarter comparable hotel EBITDA margins expanded by 120 basis points as property level cost controls, operational efficiencies, and lower energy cost and real estate taxes offset weaken [ph] our growth.

Normalizing for the ground rate increase at the Hilton San Diego Bayfront, margins for the quarter would have increased by approximately 170 basis points. So let's not talk a bit about other recent initiatives beginning with an update on our two majorly repositioning projects.

As we've discussed last quarter, we are very pleased with the performance of recently renovated Boston Park Plaza, the property looks fantastic and has been very well received, in fact in September, the hotel was awarded a Four Diamond designation by AAA.

This distinction will result in superior placements with travel agents and allow the hotel to attract groups that would not have selected the property in the past.

We have made additional progress on the redevelopment of the retail podium with a grand opening of like a cameras in September and look forward to welcoming Boston's first Starbucks reserve store when it opens in the base of our hotel in 2017.

Similarly, we are pleased with the progress of the repositioning and the recent performance of the Wailea Beach Resort.

Over the next two months, we will expect to substantially complete the remaining phases of the repositioning including Roy Yamaguchi's new restaurant concept of a market kitchen which will open in December, the final delivery of all guest rooms and our much-anticipated kids adventure pool which will have the longest water slides in Maui.

We continue to be pleasantly surprised by the performance of our Wailea Beach Resort during its renovation and much like the first half of the year, the hotel exceeded its third quarter revenue RevPar budget by over 15% as we've not have to discount the room rates as much as we originally believed and the market continues to outperform expectations.

Together, these two hotels are expected to deliver outsized RevPar in EBITDA growth in 2017, which we expect to be materially in excess of the $11 million to $14 million of EBITDA displacement realized in 2016. Now, let's shift gears and talk a bit about the current investment environment and our capital allocation strategy.

As you know, we have said repeatedly since early 2015 that we were more likely than not to be in that seller of assets.

In the past year, we have sold approximately 600 million of assets including two hotels and an online hotel purchasing platform, that is we have shrunk the company's asset value by approximately 13% for what we believe are all the right reasons and used the proceeds not only to strengthen our balance sheet and liquidity, but also to return capital to our shareholders.

We expect that we will more likely than not continue to be in that seller hotels in the current environment. In general, we look to sell the hotels in which another party is willing to pay a price well in access of our internal evaluation or hotels that we believe have inferior long-term earnings prospects.

That said, the number of hotel transactions has declined and has become marginally more difficult to sell hotels. Furthermore, we will occasionally evaluate hotel acquisitions if we believe the investment provides attractive long-term value creation opportunities.

It's worth noting however that in the current environment, the probability of an acquisition is relatively low, given the various hurdles presented by the operating environment and our high cost of equity capital.

Moving on to our balance sheet; we continue to maintain one of the lowest levered balance sheets in the space and have considerable investment capacity.

At the end of the quarter, our trailing 12-month net debt and preferred to pro forma adjusted EBITDA stood at only 2.4 times and we had $367 million of unrestricted cash in addition to all $400 million available on our credit facility.

Our leverage is low; we have significant investment capacity and have attractive options to refinance our pending loan maturities at more competitive rates while reducing secured borrowing and extending our loan maturities.

In summary, our portfolio is well-positioned to deliver outsized relative earnings growth in 2017, particularly with the anticipated contributions of our repositioned Boston Park Plaza and Wailea Beach Resort and our low-levered balance sheet and significant investment capacity gives us considerable optionality to not only safely navigate nearly any economic eventuality, but also to take advantage of it.

With that, let me turn the call over to Bryan for more details on our balance sheet and earnings guidance. Bryan, please go ahead..

Thank you, John, and good morning, everyone. At the end of the third quarter, we had $367 million of unrestricted cash on hand and $1.2 billion of consolidated debt in preferred securities. Our debt has a weighted average term to maturity of approximately four years and an average interest rate of 4.4%.

Our variable rate debt as a percentage of total debt stands at 22%. We have 21 unencumbered hotels that collectively generated approximately $214 million of EBITDA on a trailing 12-month period and an undrawn $400 million credit facility.

Our balance sheet continues to get strong and we retain considerable flexibility to take advantage of opportunities as they present themselves. As we mentioned last quarter, we are in the process of working through the refinancing of our upcoming 2017 debt maturities.

Following the completion of these transactions, we expect our weighted average interest rate to decrease, our weighted average term to maturity extend and we will have no remaining maturities until late 2019.

Now turning to fourth quarter in full-year 2016 guidance; a full reconciliation can be found on page 19 of our supplemental as well as in our earnings release.

As discussed on prior calls, our 2016 earnings are being negatively impacted by the repositioning of the Wailea Beach Resort which we expect to be substantially completed at the end of this year. As such, our guidance present expected RevPar growth for both our total 28 hotel portfolio and our comparable 27 hotel portfolio excluding Wailea.

For the fourth quarter, we expect comparable 27 hotel portfolio RevPar to decline between 2.5% and 0.5% and our total portfolio RevPar growth to decline between 2% and flat. Our fourth quarter RevPar guidance assumes a group slippage percentage of just below 80% which is approximately 400 basis points lower than the historic average.

Furthermore, our RevPar forecast assumes that travel will be weaker than normal during the election week in early November. We expect fourth quarter adjusted EBITDA to be between $69 million and $73 million and adjusted FFO per diluted share to be between $0.24 and $0.26.

For the full year, we expect our comparable 27 hotel portfolio RevPar to grow between 0.5% and 1.5%. Our full-year adjusted EBITDA margin guidance for the comparable 27 hotel portfolio reflects a contraction of approximately 25 to 75 basis points.

Excluding the impact of the previously mentioned ground rent increase at our home San Diego Bay front, margins would have generally been flat. Our full-year 2016 adjusted EBITDA guidance ranges from $320 million to $324 million and our full-year adjusted FFO per diluted share ranges from $1.16 to $1.18.

Consistent with our practice from prior years, we expect to declare a catch-up dividend in the fourth quarter that will generally be equal to our remaining taxable income. Based on our current outlook, we expect our fourth quarter distribution requirement to be between $0.50 and $0.55 per share.

Combined with the dividends paid in the first three quarters, the midpoint of our dividend guidance range would equate to a cash dividend yield of greater than 5%. Our Board of Directors will approve the final amount of the catch-up dividend and it will be declared later this quarter.

Separate from the common dividend, our board has already approved the routine quarterly distributions on both outstanding series of our preferred equity. With that, I'd like to now open the call up to questions. Leo, please go ahead..

Thank you. [Operator Instructions] We'll take our first question from Ryan Meliker of Canaccord Genuity. Your line is open..

Hey, good morning, guys. Good morning out there. Just a couple of questions.

First of all, Bryan, just in follow-up to your dividend comments, have you guys discussed all whether you're likely to pay out that dividend in the form of cash or stock going forward? I know you guys have historically liked to retain your cash and have that through up in the stock component, but it seems like with where your balance sheet is, you certainly have the capacity and we're certainly seeing a level of interest from institutional investors that we haven't seen in the past with regards to common equity dividend.

Any thoughts there?.

Good morning, Ryan. You're absolutely correct. In the past we have used the stock component of the dividend as we were moving our balance sheet to where we are today and achieving our long-term leverage levels. As you noted, we have achieved those.

The catch-up dividend for the fourth quarter this year is anticipated to be paid in cash and going forward, that would be something that would be evaluated on an annual basis. But seeing that we have achieved our leverage levels, that good assumption would be that that would remain cash..

Great. That's really helpful.

And then have you guys, or has the board thought about increasing the regular quarterly dividend at all especially where we are in the cycle and where your balance sheet is as opposed to doing such a large through up -- at the end of the year going forward?.

That's something that's always evaluated. It is dependent on where we are from a leverage standpoint, what our capital needs, investment needs are and then what our future outlook is.

That's something that the fourth quarter, we will address with our catch-up dividend and then going forward to something that the board will evaluate on the quarterly basis..

All right, that's helpful. Just one other quick question with regards to the 4Q outlook. It sounds to me that the outlook have kind of deteriorated over the past few months.

Can you just give a little bit of color on I guess what's gotten worse than three months ago that led you to lower your full-year outlook despite 3Q coming in, certainly in-line with your expectations?.

Sure. Good afternoon, Ryan. It's John. I'd say the transient, particularly commercial transient has deteriorated further and just that ability to push rate despite high occupancy levels. We continue to be disappointed by the level of discounting that we see. As mentioned in the prepared remarks, group has actually held up well.

Albeit, we've also seen -- which was partially anticipated -- we've also seen a deterioration in short-term group bookings and production that resulted in us moderating our view.

In addition, there was one piece of business in our Houston assets, a piece of training business that we're hoping to hold on to that end up canceling, which had to spring down our earnings a bit for the quarter..

Okay, that's helpful. And then as we look out to 2017 -- this is just the last one I have for you guys -- obviously you guys have some moving pieces here with asset sales and the EBITDA disruption at Wailea and at the Boston Park Plaza, plus the $5 million guarantee from Marriott that gets offset in the fourth quarter of this year.

Are you expecting any material benefits beyond just the recovery of the EBITDA loss at Wailea and Boston Park Plaza in '17 and if so, any idea how we can try to quantify that?.

We would sure hope so after what is collectively $200 million of investments and materially repositioning of those assets. We would hope to materially outperform just the $11 million to $14 million of EBITDA displacement at those two hotels this year.

We'll provide more guidance on that as we go through budget season, but we remain confident, we remain encouraged by what we see at those assets and our ability to outperform their markets over time..

All right. That's helpful. That's all for me. Thanks a lot..

Thanks, Ryan..

Our next question comes from Jeff Donnelly of Wells Fargo. Your line is open..

Good morning, guys. John, first -- good morning. First question I guess, maybe just on an outlook.

Not specific to your assets, I was curious, how are you thinking about 2017 from a supply and demand landscape perspective? Just given how we're sorting out this year and what the supply picture looks like, I know no one has a crystal ball on the demand side.

But just curious how you may be shaping what you're expecting for the industry next year?.

It does look like in most markets including our markets; we are anticipating a modest increase in supply growth year-over-year.

I've listened to what a lot of folks have said about 2017 for an industry and not speaking specifically about our company which we think we'll have incremental benefits largely because of the repositioning, but we take a look at what do we currently know, what do we currently see in the operating environment.

I think you say first off that corporate transient demand has been soft. That has been the big disappointment of this year -- perhaps not unexpected considering what we've seen in the economy particularly with business investment and corporate revenues.

Also, in the year-for-the-year group bookings and in the quarter-for-the-quarter group bookings are both down by a notable margin. Although I will tell you the bright spot there is our tentative bookings are up significantly and we wonder if that is because of noise or concern around the elections.

But at least it's a silver lining; three, I think you can take a look that year-over-year group production has now turned negative in the quarter; four, sellout nights have declined for the first time and has recovered; five is you bring up the supply growth as expected to uptake just a little bit, which I think will be more difficult going into '17 to maintain occupancy; and six, we've already witnessed a level of discounting despite high occupancy levels.

You put all that together and I would say absent, a notable reacceleration of the economic growth, it's just hard for me, Jeff, to see RevPar growth accelerating from the flat to modestly negative trends that we're currently anticipating..

That's understood. I guess I'm curious.

Do you think deceleration next year is at a 100 to 200 basis points? Or do you think it would be more material than that?.

I think there's a wide range of possible outcomes and not trying to dodge the question, but we'll provide a better outlook once we get through our property budgets on the next conference call..

Understood.

You touched on some of this on your remarks, but I recognized that you only know where the bottom is, what the benefit of hindsight, but what do you need to see to get comfortable with investing capital and share repurchases? How do you think about that?.

We clearly have the capacity. No question there. It has been robustly discussed at several board meetings and thus far we have decided to hold on to that liquidity.

I believe it's a mixture, but not just one specific item, but I believe it is a mixture of the share price itself, what we're seeing operating fundamentals, our capital requirements, our need for liquidity -- I think it's a lot of different things and quite honestly, Jeff, we just haven't pulled the trigger yet.

It doesn't mean that we won't in the future and it doesn't mean that it hasn't been considered several times by our board..

But in '17, I guess as renovations get completed, you would think that some of the demands on your liquidity maybe get lessened and maybe -- I guess it depends at the environment hold, but I guess could you see that potentially getting more consideration next year?.

Yes and I don't want to overemphasize the fact that liquidity has played a large -- has been a significant impediment to us buying back shares. Our liquidity is enormous.

We're sitting on a significant amount of cash and our leverage is so low that even if our liquidity was lower, we could lever up the buy back shares if we thought it was the right time. I think it will really come down to share price and how we view asset values in the operating environment..

Okay. Just maybe just another question or two for uncertain markets and I don't know if Mark wants to chime in. Just considering San Francisco, I don't know if you've heard any of this, but just anecdotally, I've been catching more data points about hotels looking to close their renovations during the [indiscernible] renovation.

Is that potentially something that's maybe a little bit bigger than people are anticipating or maybe a little more broad-based so you could actually face a little less competition during that kind of disruptive period? Have you guys heard anything about that?.

Jeff, hey, good morning. I think your crystal ball is better than mine. I have not heard anything about hotels literally shutting their doors. Maybe a few small boutiques, but I can't imagine with the cost structure of larger hotels in a union environment closing their doors..

Well, I mean they're closing outright, but so they're taking rooms out of service for renovations or something like that on a more aggressive basis?.

We have not got an update on that. We'll look, but I would assume that it would be normal [ph]. It would be smart for people to do it and if that happens, we will take advantage..

And then for us..

And just one last one on Houston.

I know supply is probably going to continue to be an issue, but do you get the sense that Houston maybe has found a spot among the demand side, or do you think it's still kind of eroding?.

I can only provide anecdotal evidence, Jeff and of course it is what we said, I think it was in Ryan's question that we lost a piece of training business in the fourth quarter. We're hoping that business comes back in the first quarter, but that was an incremental lump on us specifically.

I can only give you some anecdotal evidence that we've recently received in our FP for piece of training business for one of the big oil services company and that's business we haven't seen in our FP on in 18 months. That at least was positive, but I think Houston is going to remain challenged for some time..

Thanks, guys..

Thanks, Jeff..

Our next question is from David Loeb of Baird. Your line is open..

John, in the prepared remarks you talked about the low probability of doing acquisitions.

What would it take to get you to do an acquisition?.

You know, David, we've looked recently at acquisitions -- a bit hard on the one actually and with a runner up.

That was an acquisition that we believed was great long-term relevant real estate and despite the fact that there's a disconnect between public market and private market pricing, we thought that we would turn around let's say in five to 10 years and we think that that was a smart capital allocation decision. That's relatively small.

I think acquisitions are more challenged in this environment because seller's expectations just as ours are remain relatively high. So I'd say that the [Technical Difficulty] couldn't rule it out..

Okay.

On that one, what was the profile of the high bidder? Was it foreign capital? Was it a PE? Or was it a public company?.

Private equity..

Interesting. Okay. And just to go back a little bit to revenue management. There's this consistent talk about hedging debts.

Is there some risk that a lot of operators are doing the same thing and you're really all just lowering the floor for rates?.

Yes and it's Mark. Good morning. Historically, we've seen that occur as we've gone to these times of the cycles that the operators at times are our worst enemies. Yes, it's possible..

In that scenario, Mark, how much benefit do you have from brand distribution versus depending on the OTAs, both in terms of absolute rate and in terms of net rate?.

Well, obviously, brand distribution will make a difference. I also think having hotels that are renovated and positioned very well will make a difference and that we're not 'soap on a shelf' [ph] and I think our portfolio stands up very strong for that.

And then I think the brands continue to try and go more direct, but it will continue to be a struggle particularly in softer environments..

Okay, great. Thank you, both..

Thanks David..

Our next question is from Bill Crow of Raymond James. Your line is open..

Hey, good morning, guys..

Hey, Bill..

I guess my question, John, is somewhat of a combination of what you've just heard from Jeff and David and that is assuming the cycle is a little bit different than '08, '09 and '01 through '03, and we go through a more muted downturn -- what are you looking for? Signs that it's time to shift your balance sheet from being purely defensive to being offensive? Again, we've heard it from buying back stock or buying assets, but it seems to me you have to be able to see something that changes your confidence.

What is that going to be driven by?.

I think its greater clarity on where asset values are and I think that we'll have to be supportive by understanding where the potential bottom is for operating fundamentals. I hate to repeat myself, but it's disappointing to me that we're already seeing this level of discounting, given high occupancies.

That is a new twist to what we've seen in the past. In one of the recoveries we had four or five years of declining occupancy, the industry was able to push rates. I think our biggest question right now as a company is how do we invest a significant optionality that we have built up and that is something that is hotly debated.

I believe we have no pressure to us in conversations with our larger shareholders and there's a great level of confidence and no pressure for us to get capital out the door. We believe right now it's prudent to wait, but it's not as if we are not evaluating numerous investment options presented to us.

Eventually it's going to be a capital allocation decision that only history will be able to judge whether or not waiting or being more aggressive now would be the right call. But as we sit here today, we think having patience is prudent..

Appreciate that, John.

You've said before that -- I think it was the shortest book ever written, is public to public M&A -- I guess with your stock flat on year-to-date basis, which is not so bad and if we start to see some separation in multiples, does that become then something you'll look at?.

Absolutely. I would say it's a long shot, Bill. However, if our multiple continues to improve and it has improved remarkably over the past few years and our optionality, investment optionality liquidity is high, then at the right place with the right opportunity, we will evaluate.

I will say though that M&A is I think a little bit more difficult than some realize and that there are typically pretty big frictional cost in addition to transaction cost that do create hurdles.

But going back to some of our other questions, share repurchase, acquisitions and M&A are all things that are being considered and will continue to be considered..

That's it for me. Thank you..

Thanks, Bill..

Our next question is from Anthony Powell of Barclays. Your line is open..

Hi. Good morning, everyone. Question on San Francisco.

Have you been able to replace any of the city-wide declines next year with in-house group as the Moscone Center renovation ramps up?.

Yes. As Moscone Center ramps up, we continue to work aggressively at moving towards replacing. At this point our pace for next year is positive in general there, so we feel good about that. We'll get into more detail as we go through our budgeting process..

All right, great. On New Orleans, the market and the hotel there seem too rolled over a bit in the third quarter.

Is that due to oil and gas or is there something else going on to that market?.

I think the market have suffered from a little bit of oil and gas, a little bit of transients slackening. One of the positive news for 2017 is that New Orleans has its very positive convention calendar next year and we're looking forward to that.

The convention calendar this year was down 2.6% and next year it's up to 18% with market growth of conventions are from 38 to 42 and room nights are up almost 110,000 room nights. We're looking for newer means to recover nicely next year..

Got it and just one final one. I guess you mentioned discounting many times today.

How big of an impact have the direct booking initiatives been and what's your dialog been with Marriott and Hilton on those?.

Yes. First and foremost Anthony, we remain supportive of those initiatives. At this point, it's too early to really tell exactly what the cost has been in that discounting.

If we had to guess and only a guess, it's probably measured in tens of basis points, but again, that is an off-the-cuff guess and as time passes, we should have more information on that..

All right, that's it for me. Thank you..

Thanks, Anthony..

Our next question is from Shaun Kelley of Bank of America. Your line is open..

Hey, guys, good morning. You covered a lot of the ground here, but I just wanted to revisit the 4Q outlook for a quick second.

I think you guys called out -- and you answer to another question a little bit, obviously this Houston training business -- but as we just look at the absolute magnitude of RevPar that you guys are expecting in the 4Q, it's a little lighter than what we're seeing across some of the other rates.

Are there anything else either geographic or portfolio-specific that you think is sort of dragging down what we're seeing in the fourth quarter?.

Hey, Shaun. It's Bryan. Other than the weakness that we talked about in the group in Houston, there is nothing really throughout the portfolio. New York is obviously a market that has remained weak. Orlando is -- I'm sorry, not Orlando, Orlando has been very strong -- New Orleans continues to be weak for the remainder of the year.

Those major markets with San Francisco also, having some more weakness in the fourth quarter..

Okay, great. Thanks, Bryan..

Shaun, its John. The other thing we've done in addition to really just making sure we scrubbed all of our to-be group business, just based on recent end of quarter-for-the-quarter pick-up which has been soft, it's the other thing.

We went back to and challenged all of our properties just to make sure that we weren't caught off-guard by what is probably going to be a very slow travel week next week and I hate to get that granular into the business, but that also had an impact on our outlook for the fourth quarter and that is just the slow travel anticipated during election week..

Got it. Okay. That's really helpful. And then my only other question would be, John, and I think this was asked a couple of times in different ways, but you did mention in the prepared remarks some of the incentives being offered and some of the loyalty programs for differences in behavior.

Clearly you're referring to something very specific and I guess my question is, is this some from the water falling that we see and some of the points program that you're talking about? Because it didn't sound so much like it's the direct booking campaign..

No, the former. It's the water fall or the threshold depending on the brand color of 96%, 97% and perverse incentive to make sure that a lot of operators are getting over those thresholds if they are close.

A few of our competitors have talked about this in the past, what you end up seeing is if you're not sold out or close to it, typically you would expect the pricing to increase and instead you see a large portion of individual markets discounting when you should have pricing strength..

Got it. Okay, very clear. Thank you, guys..

Thank you..

Our next question is from Lukas Hartwich of Green Street Advisors. Your line is open..

Thanks. Good morning, guys..

Good morning, Lukas..

John, I thought your comments on the acquisition that you considered during the quarter were really interesting.

Can you maybe talk about that a little bit more? Given the huge discount that your company and the sector as a whole are trading at, I just think it would be interesting to hear more color about what sort of opportunities are out there and how you think about that relative to the value that your existing portfolio trades at?.

Clearly we're trading at a discount to NAV, but I don't think that all of a sudden completely turns the company off from evaluating acquisitions. We saw an opportunity and it was small.

We saw an opportunity that we thought was interesting in that, we believed we could create meaningful value, long-term value from asset management, from capital from repositioning the asset and it was something that was I believe very easy for us to do in a core competence.

That said, we remain disciplined on price and there was one of those assets, Lukas, that I thought -- again, this was way off the beat in the path and my guess is most of the rich [ph] weren't looking at it.

But it was something that I thought that if the right price, we'd look back in five years or in 10 years and say, 'Wow, I'm glad we did that despite the discount.' But as what's probably driving your question, acquisitions do become harder in this environment..

That's really helpful. Secondly, I noticed that the room count, the Hilton Times Square went up about I think 18 rooms.

I'm curious about the cost basis was for those incremental rooms?.

Yes. Hold on a second, Lukas. Roughly in the low 300s a key..

Perfect. And then lastly, this one is for Bryan.

On the two loans that are maturing next year, can you talk about the plans? How you plan to refi those and maybe some of the terms that you'd expect to get relative to the terms you have in place now?.

Sure. Good morning, Lukas. The two loans that we have maturing next year are total of $240 million of debt. They both come due at the end of Q1 next year. The mortgage is secured by the Marriott Long Wharf and the Embassy Suite Chicago. We expect right now the refinances debt with long-term unsecured debt.

We'll love to do that in the fourth quarter or into the beginning of the first quarter of next year, early next year. With these maturities refinanced, we would look to with the term of this data and our average term, the pricing these two loans are both at 5.58% the rate all in grade for the new loans would be expected to be meaningfully below that.

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That's helpful, may be just a follow up, so it looks like you guys are slowly transitioning away from mortgage debt, I'm just curious that. If you can consider senior bonds at all. .

It's something that we look at long term.

I think with the size of the company today, it still would be difficult while our balance sheet would command investment grade rating because of that the size of the portfolio and the diversity of the portfolio, and being lodging that might make it a little difficult, we think it only really make sense so we can to the point, where we could secure that investment grade rating.

but what we're doing in as you see, is that we are moving in the portfolio and that debt stacked to more unsecured using different either term loans, potential private placements, other unsecured pieces of debt to prepare the portfolio.

So, if we get to a point, we could make that transition, in addition with some of the larger asset in the complexity of those assets.

Income going [indiscernible] with that secured mortgage, makes it difficult to change flags to do large investments you have to go in and deal with servicers and get approvals, having larger complex assets like our portfolio, it makes it easier for us to do what we want with our assets With an unsecured debt on it. .

Great, thank you. .

Our next question is from Smedes Rose of Citi. Your line is open. .

Thank you. I'm just wondering you mentioned supply kicking up next year just wondering if you look across your portfolio competitive Hotel -- better competitive your existing portfolio what do you see supply grow for next year and maybe what is it for this year as well. .

Yes Smedes, by the way it's difficult because of the a lot of the information you have is your MSA or Citi. And so, you really need to get far more granular, plus there's -- there are short markets we're just not going to get supply growth figures.

This year we got a weighted average basis we're looking at about for portfolio about 2% growth little over 2% growth and we believe that in 2017 that'll tick up. On a weighted average bases we did buy rooms, we pick the total increase to a mid to high 2% number.

However I think it's fair to question how much -- how many of those hotels will actually deliver. Or deliver on time. Also when you take a look at some of the statistics for example were using Los Angeles at 3.6%. With our concentration is largely in LA-X which has very limited supply growth.

So, a slight uptick I think is fair over the roughly 2% we're seeing our portfolio this year. .

Great. And then Bryan you've mentioned I think some lacking opportunity it around. As you think about debt on the portfolio, do you guys have any opportunities to reflagged hotels or that or that potentially would give you negotiate -- negotiating strengthen on management contract. Is that any kind of near-term item. .

Yes, Smedes, this is John. Obviously one large independent hotel the Boston park plaza we've been approached by various brand particularly now that the property is -- It's completely repositioned and gorgeous form that for now were more likely to not to remain independent.

They're all a very small number of hotels where the management agreement or franchise agreements or coming due or potentially terminable on sale, and I will evaluate those as -- as those opportunities come up. .

Great, thank you. .

Our next question is from Thomas Allen of Morgan Stanley, your line is open. .

I'm sorry if I missed it but can you just talk about what you're 2017 group paces and how it's been trending. .

We haven't disclosed that yet, I will tell you though that in the past we've described it as the group pace was robust. Thomas, that is moderated based on the terms that we talked about it with its positive. But say it's gone from robust to generally positive. .

Okay, helpful thank you. And then I'm you touch uncertain market supply growth and the wide next year but can you just go through your major markets and give us some more color because of your peers have done it and I know that your sub market the slightly different, I just want to make sure that we're not making up sub market, thank you. .

Hold on one second, I am going to turn that over to Marc, actually answer that. .

So from the standpoint of the citywide next year, on you know our Washington DC market we believe it's strong given the inauguration. And they're currently trending up 13.5% or so. Boston also look solid about 10%. Santiago is down 11%. San Francisco if we talk about that several times people with little reconstruction Mosconi center is down.

Los Angeles on the other hand is a very strong almost 30%. Orlando after having a very good year this year is also up strong again next year. Chicago after soft year this year is up stronger next year. Arlington [ph] -- I mention is up strong and, and Baltimore down slightly. .

Thomas, its John. I just want to get back to one clarification point, because I think it's -- I think it's interesting and that is while our group pace for 2017 has moderated from as I said robust to marginally positive.

I should point out that are tentative group bookings which is a small number but our tentative group bookings have grown significantly. And we have had anecdotal evidence. Those are just anecdotal say it's a trend but anecdotal evidence that there are a number of group's sales contracts for 2017 business. That normally would have been signed by now.

But we have received word from the sales managers that the specific feedback has been they want to wait until after the election. So we'll see how that all plays out, but there does seem to be some level of pent up demanding group at least in our portfolio the we monitor. .

Interesting, thank you. .

Our next question is from Rich Hightower of Evercore ISI. Your line is open. .

Good morning, guys. Just one question I keep it quick.

So John, in your prepared remarks earlier you did rattle off a handful of markets that are doing better on the transient side in the portfolio average, if this is any part of that related to maybe lower adoption of technology versus some of the other usual suspects, New York San Francisco where technology adoption and the close and rebooking activity seems to be a lot higher.

Are there any major differences there. .

I don't think so Rich. I think its numerous factors playing in and to some of those specific market teams. So I can't point to qualify what portion of it is in our technology although I do believe one of the challenges for the industry right now, is the level of information that both the consumer and the operator have.

And I believe that that is -- has accelerated the level of discounting we've seen..

Okay thanks, John. .

Thanks Rich..

Our next question is from Bryan Mayer of FBR. In addition, company your line is open. .

Good morning guys, quick question on some kind of high level observations and maybe this is best for John. When we look at STR trends kind of more recently then not, we are seeing some trade down, at least better performance coming out of the lower end chain scales, you have economy through a upper meds scale.

Are you seeing or hearing anything that would compel you to believe that the consumer is trading down whether it be a leader trans and you didn't feel it feel really good because Obama care cost etcetera, or corporate whereby there pushing people to stay more at select service, even upscale select service best of all service..

Yes, Bryan. We believe that anecdotal from some purchasing managers, that certain industries are being forced to stay where their travel managers stayed, rather than circumstancing those rules, and staying at nicer hotels.

We forbid anecdotally, it seems to make sense given where we are in the cycle, and what I believe is that a revenue recession and many sectors of corporate America, I don't have really anything more than that..

Okay, thanks..

Thank you..

And there are no further questions at this time, I'd like to return the call for our host for any additional remarks..

Again, thank you very much for you interest in Sunstone, we are around if you have any follow-up questions, and we really appreciate it, have a great day..

This concludes today's Sunstone Hotel Investors' Third Quarter Conference Call. Thank you for your participation. You may now disconnect your lines and everyone have a great day..