Pebblebrook Hotel Trust (NYSE:PEB) Q1 2024 Earnings Call Transcript

Pebblebrook Hotel Trust (NYSE:PEB) Q1 2024 Earnings Call Transcript April 24, 2024

Pebblebrook Hotel Trust isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings and welcome to the Pebblebrook Hotel Trust First Quarter Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. Due to the fact that there’s another industry call this morning at 9 AM Eastern, we’ll be keeping today’s call to an hour. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Raymond Martz, Co-President and Chief Financial Officer. Thank you. You may begin.

Raymond Martz: Thank you, Donna and good morning everyone. Welcome to our first quarter 2024 earnings call and webcast. Joining me today is Jon Bortz, our Chairman and Chief Executive Officer; and Tom Fisher, our Co-President and Chief Investment Officer. But before we begin, please note that today’s comments are effective only for today April 24th, 2024 and our comments may include forward-looking statements as defined under Federal Securities laws and actual results could differ materially from those discussed. For a comprehensive analysis of potential risk, please consult our most recent SEC filings, and visit our website for detailed reconciliations of any non GAAP financial measures mentioned today. Now, let’s move on to our first quarter results.

We are pleased to share our solid financial results in Q1 despite the negative impact of some challenging weather conditions on both coasts. Our urban markets, which continue to recover portfolio coupled with diligent operating costs reduction efforts by our hotel teams, asset managers, and the company, we handily exceeded the top end of our financial outlook and key metrics including same-property hotel EBITDA, adjusted EBITDA, and adjusted FFO. Our urban markets were led by Washington D.C., which has been a standout performer. In Q1 hotel occupancy in D.C. gained an impressive 8 points rising to 61% and RevPAR increased by 7%. San Diego also produced significant gains benefiting from a strong convention calendar that in our case, was bolstered by our prior year redevelopment investment program.

In Downtown San Diego, occupancy at our properties climbed 8 points to nearly 75% and RevPAR surged by an impressive 21.8%. Our recently redeveloped properties the Hilton San Diego Gaslamp Quarter and the Margaritaville Hotel San Diego Gaslamp Quarter have been very well-received by the market. RevPAR growth for these properties exceeded Q1 2023 by 88% and 60% respectively. These Downtown San Diego hotels has quickly recovered from last year’s redevelopment disruptions, regaining more revenue and EBITDA than was displaced last year. San Francisco and Los Angeles were also solid markets this quarter. The one hotel in San Francisco known for its sustainability and luxury focus grew RevPAR by 16% in Q1, continuing to gain market share following its redevelopment and reflagging.

Overall, our urban properties increased RevPAR by almost 5% year-over-year, which helped offset a 4.4% decline and RevPAR across our resort portfolio. Notably, our same-property resort portfolio excluding LaPlaya Beach Club & Resort and Newport Harbor Island Resort maintained stable occupancy levels compared to Q1 2023, though ADR declined 4.7%. Challenging weather conditions in California, the Pacific Northwest, and South Florida affected our resorts, hindering traditional short-term leisure bookings can lead to increased cancellations. In contrast, our Key West Resorts experience our robust recovery in Q1 and compared to last year, generating positive RevPAR growth, reflecting the area’s traditional strength in the first quarter. Despite the very performance of our reserved markets in Q1, they maintained a very significant 36% premium and rates compared to 2019.

Overall, our same-property portfolio has shown a continued recovery from the pandemic, getting another 2 points in occupancy and a 1.7% increase in RevPAR versus Q1 last year. Compared with Q1 2023, our weekday occupancy has improved three points, with gains in both our urban and resort markets, demonstrating the continued recovery of business travel. Our weakened occupancies declined roughly 60 basis points, which was largely due to weather issues that discourage leisure travel. However, it is noteworthy that weekend occupancies at our urban properties improved by 50 basis points in March, perhaps an indicator that leisure events and Spring Break travel will continue to drive travelers into the cities at a greater clip than last year. In terms of our mix, the group segment leather portfolio, as group demand increased 5.7% from Q1 2023 with group revenues growing 4.9% and group’s segment increase into roughly 27.4% of our customer mix in Q1.

Transient demand also improved increasing 4% over last year as transient revenues 2 point — transient revenues rose 2.1%. On a monthly basis, RevPAR are increased 5.1% in January, 0.1% in February, and 0.6% in March, which was negatively impacted by the Easter holiday shift. February room revenues rose 3.8%, higher than the 0.1% RevPAR growth due primarily to the extra day from leap year. Our same-property EBITDA reached $59.8 million, surpassing the upper end of our Q1 outlook by $2.8 million. In addition, our recently reopened LaPlaya Beach Resort had a much better than expected Q1, exceeding our outlook by $2.3 million. This performance inspired our enthusiastic Vamos a LaPlaya to our Hotel LaPlaya team, which you heard from our opening song this morning.

The strength in our same-property hotel EBITDA results also bolstered — was bolstered by a success of our highly focused efficiency and cost reduction efforts across all operating departments, which led to an EBITDA margin of 20.3% in Q1. On a per occupied room basis, total hotel operating expenses declined by 0.7% and before fixed expenses, they declined by 2.1%. This reflects our ongoing progress in combating inflationary pressures through an intense focus on efficiency improvements. These measures include optimizing staffing levels and job sharing, enhancing procurement processes, implementing our own workers’ compensation program, and leveraging favorable contracts negotiated and arranged by curator. We also reduce our reliance on third-party contract providers by successfully filling positions internally and reducing staff turnover, while also continuing to invest in productivity enhancement, and energy saving technologies and equipment.

These strategies are part of a broader initiative to offset above inflationary cost increases in wages and benefits, energy and insurance across our portfolio. As a result of the better they expect the same-property EBITDA and LaPlaya strong performance, adjusted EBITDA was $5.3 million above the top end of our outlook and adjusted FFO per share was $0.05 better. Shifting to our strategic reinvestment program. This quarter, we made significant capital investments and progress in several properties. The $49 million transformation of Newport Harbor Island Resort into a premier New England luxury destination is substantially completed and the resort should open soon. Estancia La Jolla Hotel & Spa $26 million multi-phase redevelopment is also substantially complete.

And at Skamania Lodge, we introduced eight new alternative lodging accommodations, including completion of two two-bedroom cabins, a three-bedroom villa, and on May 1st, the expected opening of five unique luxury glamping units. Over the next year, we will evaluate the performance of these new types of experiential accommodations, which also includes nine successful luxury treehouses. This analysis will guide our decision to what types of alternative lodging to add at Skamania in the coming years, as we have an opportunity to add 200 or more additional units over the long-term. With the $33.9 million investments throughout the portfolio in the first quarter, we remain on track to invest $85 million to $90 million in the portfolio for the year.

And we are confident about the substantial upside these repositioned properties will generate in both market share and cash flow in the foreseeable future. In terms of our balance sheet, we remain in very good shape with no meaningful debt maturities until October 2025 following the successful refinancing efforts we completed just three months ago. The weighted average cost of our debt is an attractive 4.6% with 75% currently at fixed rates and 91% of it unsecured. And with that comprehensive update, I’d like to turn the call over to Jon. Jon?

Jon Bortz: Thanks Ray. As Ray indicated, we’re very pleased with our overall performance in the first quarter. Our top line operating performance was toward the upper end of our outlook range with our RevPAR growth handily beating the industry. Our bottom-line results well exceeded the top end of our outlook. We benefited from our intense focus on creating further efficiencies in the operations of our properties as Ray detail. We also realized reduced energy usage and costs, thanks to targeted sustainability initiatives and milder weather conditions. And although the bad weather negatively impacted leisure demand and revenues, it provided a silver lining in terms of energy savings. When we look at the industry results overall in the first quarter, the industry’s 0.2% RevPAR growth turned out a little softer than we were expecting.

Year-over-year demand declined every month in the quarter, now representing 10 straight months of year-over-year declines and 12 straight months of year-over-year declines in occupancy. And if you exclude Las Vegas from the industry’s results, you get a RevPAR result that is 90 basis points worse at negative 0.7% for the quarter, which doesn’t paint a particularly positive view of the rest of the industry’s first quarter performance. We believe some of the industry’s weaker performance in the quarter was related to bad weather impacting travel and potentially a greater negative impact from the Easter holiday shift. But clearly, the mid-to-lower price scale hotels continue to struggle in a major way. We believe the challenges at the mid-to-lower end are likely related to the economic pressures being experienced by the mid-to-lower socioeconomic class of consumers and businesses.

This is consistent with what is being called out by many other industries and businesses in their operating reports. Industry results also mirror our results in segmentation performance. Demand from the leisure customer was flat to slightly weaker, impacted by bad weather as evidenced by softer weekend performance. Encouragingly, business travel continued to improve with group leading the way, but with business transient clearly seeing further recovery. ADR growth was slightly softer than in prior quarters and urban and upper upscale performed the best. Supply growth continues to run well below 1%. We think it will continue to run below 1% through at least 2026 and likely 2027 or even later for our urban and resort markets where it takes longer to build and the project sizes are larger and harder to finance.

In the case of the cities, hotel economics are far below those needed to justify these much higher new development costs. For our portfolio, RevPAR growth was led by our urban markets, which grew 4.9% despite Portland and Chicago being substantially negative. Our urban RevPAR performance exceeded the industry’s urban category, which delivered 2.6% growth in the quarter. As Ray indicated, we gained 2.4 points of occupancy or 4.2% growth. However, we still have a huge occupancy recovery opportunity as our urban occupancy was almost 16 points or 21% below 2019 levels, and 2019 was not even our prior peak level of occupancy. We’ve laid out the occupancy recovery opportunity for our urban portfolio in financial terms in our investor presentation, which we posted last night on our website, so you might want to take a look at that.

Our best performing RevPAR growth properties in the quarter were led by our properties that were redeveloped in the last few years. All of these redeveloped and repositioned properties are gaining share and have significant opportunities for RevPAR share growth and other revenue growth over the next few years. As Ray indicated, the two downtown San Diego properties gained the most in the quarter. They were both under redevelopment last year, so the comparisons were easier, but they grew beyond last year’s displacement impact. The next best performers were Hotel Zena in D.C. with almost 34% growth. Viceroy Santa Monica at 18.1%, Viceroy D.C. at 16.4%, 1 Hotel San Francisco at 16.2% and L’Auberge Del Mar at 15.6%. Again, all of these properties were redeveloped and repositioned in the last few years and demonstrate the upside opportunity of our very substantial investments.

We’ve also detailed the upside opportunity related to these strategic investments in our investor presentation. With Newport Harbor Island Resort and Estancia La Jollas redevelopments being substantially completed this month, we feel we’re in a great position to drive significant RevPAR share and revenue growth over the rest of this year and the next few years. And now we’ll be able to do it without all of the noise and disruption impact that comes along with these major redevelopments. In addition, with the rebuilding of LaPlaya finally complete, we believe it’s ramp-up will be reasonably quick, and we’re already beginning to see that play out. In Q1, LaPlaya achieved $8.3 million of EBITDA, exceeding our expectations by $2.3 million. This was just $240,000 below 2019, but it was ahead of 2019 in total revenues and GOP, driven by the outperformance of the food and beverage outlets and the membership Beach Club.

We expect LaPlaya to deliver approximately $7 million of EBITDA in Q2, which, if achieved, would be more than $2.4 million ahead of 2019 second quarter. Combined with the first quarter, these first half results would give us greater confidence in hitting or beating our $22 million EBITDA forecast for LaPlaya for this year, which would put us well ahead of 2019 $17.7 million of EBITDA and well on our way to recovering to our $35 million pre-hurricane forecast for 2022. As another example of the returns on our major redevelopment investments, I also wanted to provide some color on the performance of 1 Hotel San Francisco, which was the beneficiary of a $28 million transformative redevelopment and reflagging from the independent Hotel Vitae and also a property team that recently won several Pebby Awards.

So far, we’re really impressed by the power of the 1 Hotel EcoLuxury brand and how well it resonates with the San Francisco customer. Recall that we reopened 1 Hotel San Francisco on June 1st, 2022. In 2023, just our first full year of operations in what is a very difficult market, 1 Hotel San Francisco achieved a 116.7 ADR share and a RevPAR share of 128.3 versus its luxury competitive set, which was up from a 94.9% ADR share and 93.1% RevPAR share for the property as an unrenovated Vitale in 2019. So, it’s gained more than 200 basis points of ADR share and 3,500 basis points of RevPAR share. And it’s far from being stabilized. In 2024, so far through March, 1 Hotel has gained another 150 basis points in ADR share and another 1,400 plus basis points in RevPAR share.

In 2023, we achieved 63% of 2019’s EBITDA. We recognize that may not sound great, but in a very slow to recover market like San Francisco, it represents, by far, the best performance against 2019 of all of our San Francisco properties. Please feel free to take a look in our investor presentation at this case study and a few other examples that show the returns we’ve achieved on our redevelopment and repositioning projects. As we look out into Q2 and the rest of the year, as indicated in our press release, we’re maintaining our full year outlook despite our bottom line beat in the first quarter. As you know, Q1 is our smallest EBITDA contributor of all four quarters, and we’ve become increasingly concerned about the macroeconomic environment for the rest of the year, given the changing expectations regarding the timing and number of Fed rate cuts and the continuing trend of weak demand and very modest industry RevPAR growth and the continuing normalization of the booking window as short-term bookings have not been keeping up with last year.

We’re not reducing our expectations for the second half of the year. We’re just not ready to bank the Q1 beat. So far, for the first 13 days of April, we’ve achieved RevPAR growth of almost 10%. While that is certainly very positive, it should be recognized that these days have significantly benefited from both the Easter shift as well as the Passover shift. With Passover covering the last 10 days of the month, RevPAR for our portfolio is currently tracking to be negative between 1% and 2% for the entire month. For the rest of the quarter, May looks to be strong and then June looks to be soft again. Convention timing has some impact on our monthly variability. For the second quarter, our outlook is for RevPAR growth to range from 0.5% to 2.5%.

Similar to the first quarter, we expect our RevPAR performance in Q2 will exceed the industry’s results. And similar to our first quarter outlook, this is not a conservative outlook. It is a realistic forecast at this point in time. For Q2, we anticipate finalizing and recording several significant real estate tax benefits from prior year periods, and these have been included in our Q2 outlook. Despite the unpredictability of these credits and assessments over which we have no control, these credits would result in an estimated net reduction of approximately $4 million compared to our Q2 2023 tax expense. This will contribute to a reduced expense growth rate for both the quarter and the year. Looking forward, we expect to continue to achieve substantial savings from real estate tax assessments and credits, although the timing remains uncertain.

Typically, these results stem from efforts spanning as much as three to five years. We also continue to be encouraged by our current group in total pace. Our group pace for quarters two through four shows group room nights ahead of the same time last year by 8.5% and group revenue ahead by 10.2%. With transient revenue pace up by 3.9%, our total room night pace is ahead by 7.9%, and our total revenue pace on the books is ahead by 7.1%. Q3 continues to represent the quarter with the largest pace advantage followed by Q4 on a percentage basis. Nevertheless, given the slower in the month for the month and in the quarter for the quarter booking trends we’ve been experiencing, we remain cautious about the second half due to this normalization of the group booking window as well as the softening macroeconomic environment.

Finally, as Ray indicated, we’re very excited about the completion of the $26 million Estancia La Jolla multiphase redevelopment and repositioning. The property looks fantastic and it’s already receiving glowing reviews from customers. We should be able to drive strong growth as the La Jolla submarket of San Diego is extremely robust due to the vast amount of capital flowing into the expanding biomedical industry that surrounds the property. In addition, UCSD, which is the largest university in the California system and is located directly across the street from the property is also growing like crazy and will continue to drive increased demand into the resort. With the additional completion of Newport Harbor Island’s $49 million comprehensive transformation and the completed rebuilding of LaPlaya in Naples, along with the recent redevelopments of Jekyll Island Club Resort, Chaminade Resorts, Southernmost Resort, San Diego Mission Bay and the alternative lodging being added at Skamania Lodge, our resort portfolio is poised for strong growth in the future as leisure and group demand strengthen.

That completes our prepared remarks. Donna, you may proceed with the Q&A.

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Q&A Session

Operator: The floor is now open for questions. [Operator Instructions] Today’s first question is coming from Dori Kesten of Wells Fargo. Please go ahead.

Dori Kesten: Thanks. Morning. You note that short-term group bookings have slowed. Can you provide a bit more context around that? And have you seen anything else that has given you pause such as media planners pushing for lower F&B minimums or pushing harder on room rates?

Raymond Martz: Sure. Yes, I mean, our best guess today based upon conversations with clients is that it has more to do with the booking pattern normalizing. So, really, what’s been happening over the last year is that meeting planners and businesses are booking their meetings further out than they were a year before. And so when we’re coming upon in the year for the year or in the quarter, for the quarter, certainly in the month for the month, we’re seeing less pickup versus last year because they’ve already booked a meeting. And so the pace advantage we have, that’s part of why we’re being a little more cautious with assuming it all converts into the same kind of percentage growth over last year because we think we’re going to lose some of that pace advantage due to this normalization of the group booking window.

We’re not seeing any changes in attrition, in cancellation, we’re definitely not seeing any reductions in spend outside of the room or what groups are committing to. So, from our perspective, we don’t think it’s indicating any change in confidence on the part of businesses reacting to a more cautious economic environment. We do think it has — it’s primarily due to the normalization of the booking timing window.

Dori Kesten: Thanks.

Raymond Martz: Thanks Dori.

Operator: Thank you. The next question is coming from Floris Van Dijkum of Compass Point. Please go ahead. Floris, please — your phone is not on mute. I’ll move on to the next question coming from Smedes Rose of Citi. Please go ahead.

Smedes Rose: Hi thanks. I was just wondering if you could talk about a little bit more about any kind of visibility you’re seeing into summer leisure trends across your resorts?

Raymond Martz: Yes, I mean I think it’s a little premature to have any kind of judgment based upon what we’re seeing from the resorts. I mean the comment I would make that we feel good about right now and we indicated in our call, is that the group pace is up significantly in the third quarter and some of that is in the summer months of July and August. So, we certainly look like we have a good base on the books. From a transit perspective, it’s not quite as clear. And as you know, folks make airline reservations well before typically they make their hotel reservations. So, we’re encouraged by the commentary that’s coming out of the airlines about strong summer bookings. But I think in terms of how we look, I think it’s too early to make a judgment as to whether they’re going to be up a lot or they’re going to be positive or negative.

Smedes Rose: Okay. Thank you.

Operator: Thank you. The next question is coming from Floris Van Dijkum of Compass Point. Please go ahead.

Floris Van Dijkum: Hi. Hey guys. Good morning.

Raymond Martz: Morning.

Floris Van Dijkum: Wanted to ask you, if I look at your deck, the upside potential on your urban portfolio appears larger than some of the returns that you’re penciling in for mostly our — largely your resort assets that have been renovated. As you think about capital allocation, Jon, where would you put incremental capital today? Where would you invest it? Would you invest in your resorts? Or would you invest more in urban assets?

Jon Bortz: Sure. So, I think the answer is sort of different than the two alternatives that you provided. So, any incremental capital, we have been and would continue to invest in buying our own stock back. So basically, we’d be buying a greater percentage, if you will, of the assets that we already own. We feel like it’s a good mix between urban and resort, between business, group and transient, and leisure. We’ve invested hundreds of millions of dollars into the portfolio, repositioning properties to where we think they have their highest and best positioning, where there’s significant upside in share growth, revenue growth, and profitability. And so today we’d be buying our existing stock back, which trades at somewhere in the range of a 50% discount to where we think the individual assets would sell.

So I think from that perspective, it’s an easy answer. I think based upon where we sit in the portfolio, and maybe this answers your question in one way, we’re still likely, if we’re selling assets, we’re still likely to be selling some urban assets in markets that have been slower to recover, not because their growth rate or the recovery rate isn’t great, but the alternative capital usage returns are much higher, meaning buying our stock back and paying down debt along with the EBITDA that we sell. So it wouldn’t generally involve selling our resort assets within the portfolio, which, again, we continue to believe have very significant upside in the portfolio.

Jon Bortz : And, Floris, also just to highlight in our deck, yes, we have over $50 million of upside. We have been in the bridge from the urban recovery that’s primarily because the urban markets have felt the most significantly more than leisure markets after the pandemic and slowly recover. So we ended 2023 at 69% occupancy in our urban hotels and the bridge just shows us if we get to 80% with the upside opportunity, which is still below where our prior peaks were. So that, again, shows the tremendous growth from the urban assets that are to be realized in the portfolio, and we expect the next couple of years to achieve that.

Floris Van Dijkum: Thanks, guys.

Jon Bortz : Thanks, Floris.

Operator: Thank you. The next question is coming from Duane Pfennigwerth of Evercore ISI. Please go ahead.