Pebblebrook Hotel

Thank you for standing by. This is the conference operator. Welcome to the Pebble Brook Hotel Trust first quarter earnings call. As a reminder, all participants are in listen only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, You may signal an operator by pressing star and zero. I would now like to turn the conference over to Mr. Raymond Martz, CFO. Please go ahead, sir.

Thank you, Carl, and good morning, everyone. Welcome to our first quarter 2020 earnings call and webcast. Joining me today is Jon Bortz, our Chairman and Chief Executive Officer. But before we start, a quick reminder that many of our comments today are considered forward-looking statements under federal securities laws. and these statements are subject to numerous risk uncertainties as described in our 10-K for 2019 and our other SEC filings, and future results could differ materially from those implied by our comments. Forward-looking statements that we make today are effective only as of today, May 8, 2020, and we undertake no duty to update them later. You can find our SEC reports and our earnings release, which contain reconciliations of the non-GAAP financial measures we use, on our website at pebblebrookhotels.com. Well, the first quarter of 2020 has indeed been like no other in the history of the hotel industry. The thoughts of the entire Pebble Brook team are with the families who have lost loved ones to this pandemic, as well as the tremendous thanks and appreciation for all the first responders and healthcare workers on the front lines. The speed at which this pandemic has impacted the world has been incredible, causing cities and states across the United States to effectively shut down through the imposition of shelter-at-home policies and mandating many businesses to close or significantly curtail their operations. In addition, the federal government decided to close our borders to international travelers and commerce and restrict all other non-essential travel. All of these factors led to a situation where hotel demand rapidly dropped to virtually zero in a matter of just weeks beginning in early March. Our response has been swift and decisive as we reacted to this crisis, which changed by the day. Our three immediate strategic priorities were the first, Thank you for joining us today. in response to mandated restrictions and closings required by local and state government officials to help ensure the safety of our guests, workers, and communities. As of today, 46 of our 54 hotels and resorts have temporarily suspended operations. Our remaining eight hotels, for various reasons, are open and operating with skeleton crews and limited services and amenities. As a result of these actions, first quarter same property rep are declined 25.5% compared to the prior year period, with same property total revenues declining 23.1% to $255.8 million. Same property hotel EBITDA declined 55.2% to $40.6 million. Of note, March room revenues declined 65.8%. Our ability to reduce hotel level expenses in March was challenging, given how quickly and substantially the operating environment changed. which caused a rapid and dramatic increase in group and transit cancellations in the month. Nevertheless, total hotel expenses before fixed costs were still reduced by 42.7% compared to last year. Our adjusted EBITDA was $35.9 million and our adjusted FFO per share was 13 cents. This reflects the impact of the decline in hotel demand and subsequent suspensions of hotel operations. In addition, we incurred approximately $5 million of one-time charges relating to the furloughing of hotel-level employees, which included future hotel health care benefits and other payroll costs that were recorded in March per gap. We also recorded a $16 million non-cash write-off for our long-term retention chair awards that had just been issued in late February prior to the pandemic, which our executive team and other officers volunteered to forfeit as part of our corporate expense reduction measures. Imagine that, a $16 million corporate write-off as a result of the forfeiture of restricted shares, which is a benefit for the company. You've got to love Gap. We also generated gains from the sale in early March of the intercontinental Buckhead and Sofitel DC hotels, a Gap gain of $117 million and a taxable gain of $160 million. The sale of these two properties represent the culmination of two very successful investments, and the timing of the sale was obviously very fortuitous. but also a consequence of negotiating a strong and favorable contract. Since the closing of our corporate acquisition in November 2018, we successfully completed sales totaling $1.66 billion of hotels at a 5.6% cap rate as part of our strategic disposition plan. Shifting to our second priority in response to the COVID pandemic, preserving the liquidity of our business, we took numerous actions since the crisis became apparent. In addition to instituting drastic expense reductions throughout our portfolio, we also quickly suspended operations at the vast majority of our hotels and resorts, which significantly reduced operating losses. This including furloughing the majority of our hotel-level workers and reducing number of employees at our hotels to skeleton crews, while also ensuring the security and safety of our hotel associates and our properties. Our hotel asset managers also work closely with our hotel teams in management companies to aggressively reduce our non-payroll expenses across the portfolio. We thank our management teams for reacting so quickly and decisively in a challenging environment. This of course mitigates our monthly cash burn during this crisis. As a result of these swift and decisive actions, we reduced our monthly hotel level operating expenses by more than 75%, leaving an estimated average monthly cash burn at our hotel level at approximately 15 to 18 million or about $1,200 per key per month. And we continue our efforts to further reduce this cash burn. At our corporate level, we estimate monthly cash G&A at approximately $2 million, which reflects a reduction in compensation for every executive officer, member of the Board of Trustees and employee at Pebble Brook, including Jon, who volunteered to forego his salary for the remainder of 2020. We also modified our annual cash bonus program to provide that bonuses earned for 2020, if any, will be paid next year and paid in common shares instead of in cash. Also, as previously mentioned, our executive team and officers of the company agreed to voluntarily forfeit long-term retention share awards that were issued in late February. Our combined reductions in corporate G&A total approximately $8.5 million for the remainder of the year. As with our hotel-level cash burn, we'll continue to look for further reductions in our corporate G&A expenses as appropriate. Finally, our interest, expenses, and preferred dividend payments total approximately 8 to 10 million per month. We reduced our normal quarterly common dividend from 38 cents to one penny per share, beginning with a first quarter dividend, preserving $50 million per quarter in cash, totaling $150 million of savings for the year. Combined, given our comprehensive initiatives at the hotel and corporate level, we estimate our average monthly cash burn to be approximately $25 to $30 million, which excludes any capital investments. As it relates to our capital investments, we have invested approximately $50.1 million into our hotels through the end of the first quarter. We currently expect to invest an additional $75 to $85 million over the balance of the year, mostly to complete our ongoing major redevelopment projects. To further enhance our liquidity, we've elected to defer more than $100 million of major redevelopment projects to 2021 and beyond. We will re-evaluate these projects as we gain more clarity on the economic environment in our outlook. Turning to our balance sheet, as of the end of March, we had $746.8 million of cash on hand. This increase from year-end last year is primarily a result of drawing down on the remaining availability on our $650 million unsecured credit facility in mid-March to increase our liquidity, as well as the $331 million of cash proceeds from the sales of Intercon Buckhead and Sobatel DC in early March. We believe this provides us with sufficient liquidity over an extended period. However, we will continue to evaluate other sources of liquidity, including additional term loans, property-level financing, government loan programs, or other debt financings. We will also assess additional property sales. The transaction market is largely frozen currently as the debt markets and buyers and sellers recalibrate values. We believe transactions will likely be on hold until at least the second half of this year and will likely favor all cash buyers rather than those who need debt. regarding our debt, as a reminder, all of our debt is unsecured and we have zero debt maturities until November 2021. As of March 31st, our net debt to the appreciated book value was just 34%, which indicates that we entered this crisis with very low leverage and demonstrates that we don't have a debt problem, but clearly we have a revenue and EBITDA problem as a result of the economic stop in response to governmental efforts to contain the pandemic. Looking at net debt to the appreciated book value represents a good proxy for leverage given the lack of demand and lack of revenues in the current hotel operating environment. As it relates to our financial covenants under existing unsecured credit facilities and unsecured notes, we are currently in compliance with all of our loan and note agreements. However, given the substantial decline in hotel revenues, we anticipate the need for a waiver of certain covenants beginning with the second quarter ending June 30th. As a result, we're in discussions with our bank group and note holders and we expect to finalize this waiver agreement soon and we'll update you accordingly. Regarding our third priority, which is to ensure we are well prepared for the new hotel operating environment and to take advantage of the opportunities when the recovery begins, I'd like to turn the call over to Jon to discuss our plans and what lies ahead for the hotel industry and Pebble Brook. Jon? Thanks, Ray.

These are without question unprecedented times. Along with many other industries, the hotel industry has never before experienced an event that has effectively eliminated almost all segments of travel and hotel demand around the world at the same time. And since this crisis is a result of a pandemic, it's unclear how long the impact will last, how much damage it will cause to the economy, both now and in the future, and what impact it will have over the long term on travel, human behavior and the lodging business. As a result of this uncertainty, as Ray indicated, it's best to focus our efforts on protecting the business under the assumption that the negative impact will last for a significant period of time. So plan for the worst and hope for and do everything we can to achieve the best. As we plan for the remainder of 2020, We start with the knowledge that the recovery will be dictated by the virus and the world's ability to mitigate it, so predictions are obviously difficult. Based upon what we understand, we believe it's reasonable to expect a significant disruption to most of the demand segments for the better part of this year. But we currently expect that the second quarter will be the worst quarter, with April being the worst month and the third and fourth quarters providing a slow but positive improvement. Beyond that level of detail, no one can really know or predict how this is going to play out. But again, the good news is it should get better from here. Leisure transient should be the first to recover, then business transient, then small group, then larger group and city-wide. We believe group, particularly larger group, will be the hardest hit and most of it is not likely to return any time this year without an effective health solution. We've counseled our property teams to assume that none of the group on the books will materialize and they should plan and staff accordingly. It's uncertain when government restrictions on gatherings will moderate but most state and local governments have already indicated that large gatherings are likely to require significant health advances before being allowed. And even if they are allowed, it's unclear how willing individuals will be to congregate in large groups without substantial physical distancing and other requirements like masks and testing. We also expect companies to be very cautious with travel. likely limiting travel by their employees to truly essential travel only, thereby eliminating much of the demand from business. So we really can't count on the corporate transient business that was previously on the books and may still perhaps be on the books to actually show up. Corporations were the first to impose severe travel restrictions and we expect they will be the last to reduce or eliminate them. Outside of major corporate travel, we would, however, expect a healthier recovery from some small businesses, service providers, vendors, consultants and others where travel is more critical to their businesses. In addition, international travel is likely to be fairly minimal for the rest of the year given not only governmental restrictions but anxiety on the part of travelers to not only get on a plane but to go far from home in an uncertain world. With domestic leisure travel as the one segment likely to return, and hopefully in a material way, we expect resorts to be the biggest beneficiaries, particularly drive-to resorts. For Pebble Brook, Drive-to resorts represent about 20% of our historical EBITDA, and leisure travel represents over 80% of the historical demand at our resorts. As a result, we look at our hotels that have suspended operations. We expect our resorts to be some of the first properties we reopen. In fact, we're looking at reopening our first resort late this month, with others likely to follow over the next month or two as states open up and demand returns. Fortunately, all of our resorts are on large pieces of land with significant space for guests to spread out and feel safe, such as Skamania Lodge outside of Portland, which sits on almost 200 acres, Chaminade Resort in Santa Cruz on 300 acres, Paradise Point on 44 acres in San Diego, and similar large pieces of property at San Diego Mission Bay Resort, Lobert's Del Mar, Southernmost Resort in Key West, La Playa Beach Resort and Club in Naples, and the marker Key West Waterfront Resort. While we expect leisure to lead the recovery, we also expect its recovery to be relatively modest as well due to both health risks and economic issues. Unfortunately, We shouldn't forget that many leisure demand generators are on hold right now, including sporting events, festivals, concerts, marathons, entertainment parks, and other similar attractions. And most cities have closed all of their cultural and tourist facilities, though we expect these to reopen over the next few months. And older travelers can be expected to be more cautious about travel. Some of these leisure headwinds will be offset by Americans who will not go abroad for their vacations and instead vacation here in the U.S. We expect to reopen our properties one at a time based upon demand and only when they can be operated in a manner that at a minimum results in us losing less money than if they were to remain closed. Because we expect demand to recover slowly Unfortunately, we will have no choice but to bring our hotel associates back slowly as well. 2020 is likely to be challenging all the way through unless we have an effective healthcare breakthrough. Hotel operations will certainly be different as we move forward post-lockdown. We'll have enhanced cleaning protocols to protect our hotel associates as well as guests. with an industry-wide certification we're working on through the AHLA with the cooperation of every major brand in the U.S. The cost of these additional protocols is likely to be covered by reductions in services and amenities, including the likely elimination of in-room housekeeping during a guest's stay. We should expect there will be significantly more cross-training, job sharing, and shifts work by managers, particularly until occupancies rebound to more normal levels. Food and beverage, when it does return, is likely to be materially simplified with more preparation and less cooking, which will help reduce costs. There will be a number of positives longer term that we can expect will come out of this crisis. Let's talk about future supply first. We should expect new starts to quickly fall to a trickle because, frankly, who in their right mind would provide financing for a new hotel at this time, given the massive uncertainty that exists? We also think some of the hotels under construction will stop permanently due to financing that backs out. As we know, construction has been stopped or slowed in many markets for various reasons. But what will deliver in the next couple of years will deliver later and in smaller numbers than previously estimated. In addition, in markets that were challenging even before the pandemic, like New York and Chicago, we expect to see many hotels and rooms fail to reopen, with perhaps many of them likely converted to affordable housing or homeless facilities as a higher and better use. and we don't expect much in the way of new hotel starts for the next three to five years, given how long it's likely to take for positive economics for hotels to return. Operations will likely become more efficient as has historically occurred in prior Black Swan type events. Expect some services and amenities to be reduced or eliminated. with changes in areas such as restaurants, in-room dining, and banquets and catering. High touch will become low touch or even no touch. Technology will replace hours worked in some cases. Expect more cross-training and job sharing. More fixed costs will become variable costs. And we expect real estate tax assessments to decline. And while tax rates are likely to increase, We still think it's likely the combination results in declines for hotels in particular over the next few years. This crisis has also instantly relieved labor pressures. In just one month, we've gone from an industry with a significant lack of labor to an industry with an overabundance of labor. We should expect labor to become more flexible Wage rate increases will abate and unions should become more flexible on work rules and other matters. This industry will need all the help it can get to reopen and recover. Leverage will surely shift to a better balance between employers and employees. And we think it's likely there will be less financial pressure from new requirements imposed on the industry from governments, particularly local and state governments. For Pebble Brook, we would expect our hotels to outperform their markets in the recovery years, similar to what they did last year and early this year before the pandemic struck. Our hotels are in better condition on average than our competitors in our markets. 40 out of 54 of our properties have undergone major renovations redevelopments or transformations in just the last five years, nine in just the past few months, including those being completed as we speak, and 10 more in 2018. This will be a big advantage over the next few years. Many of our private sector competitors are likely to lack the capital to maintain their hotels in years to come, widening the advantage we already have. We expect hotel conditions will rule with the customer base as they have in prior recessions and in the early years of prior cyclical recoveries following significantly harmful events. We also expect our lifestyle hotels to outperform in the recovery because of their experiential focus for customers looking for something that lowers the stress and anxiety that will now likely be associated with travel. We also think they'll outperform because of their more personalized nature of the services we're able to provide to our guests and because of the attractiveness of our typically smaller sized footprints and smaller public areas, which should allow our customers to feel safer in our properties. Our smaller sized lifestyle hotels, including our properties with major lifestyle brands like Luxury Collection and W, are generally more attractive to transient customers, particularly leisure, and they historically have needed less group to be successful. Our independent lifestyle hotels are also able to operate more efficiently than major brand hotels, and they can move faster to adapt to new customer preferences. They're more flexible in their operations, and they sport lower fixed and variable costs in a low occupancy environment. which is what we expect for at least the rest of this year. We also expect there to be significant opportunities over the next few years to acquire properties in distress due to a likely prevalence of cash strapped and over levered owners and many properties that go back to lenders. Our team has been through two prior crisis driven opportunistic periods including the creation of Pebble Brook in late 2009 following the tail end of the Great Recession. Following that crisis, we were able to fairly quickly and aggressively assemble a very unique portfolio of high quality hotels and resorts at very attractive prices that also had substantial upside opportunities. Given our ability to operate our properties more efficiently than the vast majority of buyers and our unique strength in redevelopments and transformations, We believe we'll have a significant advantage as opportunities arise over the next few years. To create long-term value for Pebble Brook and without taking away from our current efforts to protect the company, we also continue to put time and effort into advancing our branding opportunities. This is an opportunity we believe is unique to us because of the large number of independent lifestyle hotels that we own and control. We expect to roll out our completed unofficial Z Collection website later this quarter. This will allow us for the first time to connect our soon to be seven unofficial Z Collection hotels in the eyes of our guests. This should provide some help to these properties in their recovery. We also continue to aggressively pursue the creation of a broader independent lifestyle hotel and resort collection by seeding it with our 31 completely independent hotels and resorts. We'll provide more updates as these efforts progress, but we're convinced there's a long-term value creation opportunity here that should commence sometime this year. Finally, it's safe to say we all find ourselves in uncharted territory with an almost complete lack of clarity about the future. We're confident, given our senior management team's experience successfully navigating prior crises, including following 9-11 and the Great Recession, that we have the reputation, foresight, creativity, work ethic, track record, and an incredible team combined with strong liquidity and a fantastic portfolio to not only grind through the current challenge, but thrive during the recovery and next up cycle. We greatly appreciate your confidence in us and we look forward to once again proving our ability to create value with our unique portfolio, our experience, our team and our creative approach to the business. With that, we'd be happy to move on to questions. Operator, you may proceed with the Q&A. Thank you.