Pebblebrook Hotel

Greetings and welcome to the Pebble Brook Hotel Trust third quarter 2020 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Raymond Martz, Chief Financial Officer. Thank you, sir. You may begin.

Thank you, Christine, and good morning, everyone. Welcome to our third quarter 2020 earnings call 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 risks and 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. Four looking statements that we make today are only effective as of today, October 30th, 2020, and we undertake no duty to update them later. Our SEC reports and our earnings release contain reconciliations of the non-GAAP financial managers we use, which are available on our website at pebblebrookhotels.com. Okay, we now have 39 hotels open, marking a significant increase from the end of March when we had just eight hotels opened, and from our second quarter earnings call at the end of July when we had 24 hotels opened. Of the 14 hotels that are currently closed, 10 are in San Francisco, with one each in Chicago, New York, Portland, and Washington, D.C. We will reopen these hotels as demand and economics warrant. Our monthly cash burn has further improved as a result of healthy leisure travel demand, the beginnings of a recovery in business travel, and opening additional hotels during the quarter due to improving demand and economics. It's been running at just $5 to $8 million at the hotel level, $10 million better than the $15 to $18 million cash burn we estimated back in May. Our total average monthly cash burn, which includes our corporate GNA, interest, and dividend payments, is now running between $16 and $21 million. This is $9 million better than the $25 to $30 million estimate we were experiencing in May. With an increasing number of travelers feeling confident about traveling, in staying in hotels each week, we've been pleasantly surprised by the positive momentum in the last few months, given the intense uncertainty in the pandemic environment. For the third quarter, same property revenues of $77 million were 80.7% below the prior year period, with total hotel level expenses of $96.2 million, which were reduced by 63.2% from the prior year third quarter. Our expense reduction was 78% of the revenue decline, which illustrates our operating and asset management team's tireless efforts to reduce expenses significantly given the drastically altered operating environment. Excluding fixed operating costs, such as property taxes, insurance, and ground rent, operating expenses were slashed by 70.8%, which was 88% of the revenue decline. We feel good as we can about these comparable operating results given the environment. Our hotel teams did a great job reducing operating expenses at both the suspended hotels and the open hotels. As we noted in last night's earnings press release, we continue to experience healthy leisure demand. Since Labor Day, we've seen a modest uptick in business travel demand, while leisure travel has held up better than its traditional post-Labor Day decline. Our total portfolio generated $21.1 million of revenue in July, with 24 hotels open, 25.8 million in August with 35 hotels open and $30 million in September with 35 hotels open. For October, we are on track to meet the total revenues we achieved in September, which is encouraging, particularly without the benefit of a long holiday weekend like Labor Day and with leisure demand being negatively impacted by Halloween and the last weekend of the month. For the third quarter, same property hotel EBITDA was negative 19.3 million, compared with a positive $137 million from the prior year period. However, it marks a significant improvement from the second quarter when EBITDA was negative $40.8 million. On a per-key basis during the third quarter, our hotels generated revenues of $5,800 per key, hotel expenses of $7,300 per key, resulting in negative hotel EBITDA of $1,500 per key. By month, same property hotel EBITDA was negative $6.8 million in July, negative 7 million in August with 2.1 million of retail rent write-offs and negative straight line rent impact and negative 5.5 million in September. We currently expect our same property hotel EBITDA in October to be roughly in line with September. We are also encouraged that our open hotels were also EBITDA positive in total for the quarter and in the months of July and September. August would have been EBITDA positive after the removal of the negative impact of the retail rent write-offs and straight-line rent adjustments. Our eight resorts have been the bright spot in our portfolio all summer, as well as so far in the fall due to their obvious appeal to leisure demand and their desirable drive-to locations. They generated a positive $12.6 million of hotel EBITDA in the quarter. This resulted from an occupancy of 51%, an average daily rate of $303,000, which was almost $30 over the prior year period and is 10.3% over an increase over the prior year. As a result of the new operating models at all of our hotels, we achieved a GOP margin at our resorts 10 basis points higher than last year's third quarter, despite a 30% decline in rooms revenue and a 30.5% decline in total revenues at our resorts. We think this is a pretty incredible achievement and not only a testament to our property teams, but how we'll be able to operate much more efficiently on an ongoing basis in the future. As a reminder, leisure transient portfolio wide has historically accounted for about 40% of our demand with corporate transient at 35% and group at 25%. Our adjusted EBITDA was negative 27.6 million in the third quarter compared with a positive 136.5 million in the prior year period. Our current quarter also reflects 1.8 million of one-time costs related to suspending and dramatically reducing operations. Adjusted FFO per share declined to a negative 51 cents per share compared with a positive 77 cents per share in the prior year period. Shifting to our capital improvements in the quarter, we invested 20.8 million of capital into the portfolio, which is primarily related to completing two transformational projects, the redevelopment of the Donovan Hotel as Hotel Xena, Washington, D.C., and the transformation of Mason & Rook into the Viceroy Hotel, Washington, D.C. We currently expect an additional $15 to $20 million in capital investments during the remainder of 2020, which includes the expected commencement before year end of the $10.5 million redevelopment of the luxury La Berge Del Mar Resort in Southern California. As we look forward to 2021, we currently don't expect to commence any other significant capital renovation projects during the year. However, we'll continue to move several transformational projects forward through the design and permitting phases so that we're in a position to quickly commence work on the improvements at the appropriate time in the future. Shifting to property dispositions, as we previously reported on July 29th, we sold the Union Station National Hotel for $56 million, which increased our available liquidity. Year-to-date, we've completed $387 million of property sales. Turning to our balance sheet, at the end of September, we had $2.4 billion of debt, 100% of which is unsecured, and an effective average interest rate of 3.8%. This equates to a net debt to depreciated book value of approximately 38%, which is less than 30% of our estimate of our hotel portfolio's replacement costs. We had $353.2 million of availability on our $650 million unsecured credit facility, and $217 million of cash on hand, which implies total liquidity of $570.2 million for our ongoing operating and capital investment needs, which should be far more liquidity than needed to get us to the point of generating positive cash flow sometime next year. Overall, we're in good shape with our debt maturities. We have just $57 million of debt maturing in November 2021 and no meaningful additional debt maturities until November 2022. And with that, I would now like to turn the call over to Jon. Jon?

Thanks, Ray. So I thought I'd start by hitting the highlights of what we saw during the quarter and what we're seeing now. Of course, it all starts with the leisure traveler, which was the primary demand segment during the quarter and has continued to be so since the end of the quarter. Our eight drive-to resorts and our drive-to getaway markets, such as San Diego and Los Angeles, have been our strongest performers due to their easy access, their outdoor amenities and activity offerings, and their favorable weather. Yet leisure has been driving business in our urban markets as well, like Philadelphia, where people are just looking to get away from their homes and the monotony of their routines for a weekend in a downtown or city hotel. We saw leisure demand increase throughout July and August, peak over the three-day Labor Day weekend, but continue post-Labor Day and into the fourth quarter. We even saw an improvement over the Columbus or Indigenous Peoples holiday weekend in early October. While leisure travel has softened from the summer season's traditional strength, the post-Labor Day fall-off has been nothing like a typical year. Weekends continue to be strong, relatively speaking of course, and we continue to see weekday leisure travel as well, with many people having flexibility due to work from home and learn from home in many places. In fact, occupancies at both our resorts and our urban properties have been better in September and October than in August, and but for the Labor Day weekend, they've been better in October then September. Weekends at our resorts ran 84% in August, 83.3% in September, and 83.3% so far in October with just one weekend left. Weekends at our urban properties ran 38% in August, a much improved 50% in September, and 48.9% so far in October. In total, weekends for our open hotels ran 48.8% in August, 57.1% in September, and 56% month-to-date in October. During the third quarter, and particularly since Labor Day, we've also seen the beginnings of a modest recovery in business travel. This has primarily been business transient, But we've booked and cooked some small business groups as well. We've also accommodated a growing number of small social groups, including micro weddings, anniversaries, and reunions, most of it in the outdoors. And more of it is in places like La Playa in Naples, Florida, and Skamania in the Columbia River Gorge in the state of Washington, as those states have allowed larger group gatherings. We expect this recovery in business travel to be a prolonged process, with the pace of its recovery likely dictated by health advances, slowing the spread of the virus, and improving the outcomes from the virus. And it certainly seems it's at least a couple of quarters away from today. Outside of our resorts, which were our best performing properties, our hotels in San Diego, Los Angeles, Boston, and Philadelphia have been our best performing markets. San Diego, of course, is benefiting from the consistently great weather, the fact the mayor has done a great job safely reopening and marketing the city and its attractions and amenities, the fact that it's a short drive from a large population base, and on a relative basis, its traditional lack of significant business transit travel that has otherwise been severely impacted by the pandemic. L.A. is also benefiting from its traditionally more attractive weather, the outdoor nature of the west side of L.A., its beaches, and the return of travel related to music, television, and movie production as those industries reopened in the third quarter. Boston is benefiting from travel related to healthcare, biomedical and biotech, all of which are booming right now, as well as the strong education base in the city. It's also benefited from the safe way it has reopened. And finally, Philadelphia. Not sure why Philly is doing so well, other than the historically strong restaurant and outdoor and other amenities the city has to offer, and perhaps it's a getaway alternative to New York City. In addition to being encouraged by the continuing health of leisure travel and the beginnings of a recovery in business travel, we're even more encouraged by the dramatically improved efficiencies at our property operations with all new operating models at each property. You've heard me say this before, but we've literally gone through a true zero-based budgeting effort between our asset management team and our operators. As Ray noted, our open hotels achieved positive EBITDA in total throughout the quarter, even as we opened additional hotels in the urban markets that have been slower to reopen and recover. Hats off to our teams for doing an incredible job to mitigate our losses and drive positive EBITDA where possible. We know they're working with slimmer teams with lots of cross-functional efforts. Truly an incredible team effort. I thought I'd provide a few portfolio-wide facts and a few property-specific examples. On a portfolio-wide basis, for our open hotels, room revenues declined 69.6% from Q3 last year. Total revenues also fell 69.6%. Rate was down 19.7%. Total expenses were reduced 54% and GOP declined 82.6%. GOP margin went from 42% last year to 24.2% this year. We think this is a pretty amazing effort by our operating and asset management teams. As we reopened more properties in the quarter and as performance improved during the quarter, more properties achieved positive GOP. We went from 16 properties with positive GOP in July to 18 properties in August to 26 hotels of the 35 that were open in September. And here's a few examples of individual property performance so you can understand how significant the changes in the operating models have been. At Southernmost Resort in Key West in September, A seasonally slow month in Key West. Room revenues were actually higher this year than last year, up by 5.6%, with all of it being occupancy, as rate was down a dollar. Total revenues were up over 15% in the month, including food and beverage, parking, and spa, which of course are not as profitable as rooms. Even with some higher cleaning and operating costs related to maintaining the health and safety of our associates and guests, GOP grew by 28.6%, and the team delivered a GOP margin 530 basis points higher than September last year. At the Marker Waterfront Resort in Key West, room revenues were down 5%, with total revenues declining almost 7%. Yet GOP increased 5.8% from September of last year with GOP margin climbing 550 basis points. Outstanding performances by our teams at both Key West properties. At La Playa in Naples, room revenues also increased in the seasonally slow September month. in this case by almost 16%, with total revenues growing by just over 7%. GOP increased by 164.5%, with GOP margin climbing from 11.4% to 28.2%. At Lobert's in Del Mar, outside of San Diego, room revenues declined by 12.6% from last year, with total revenues down by 33% due to a lack of group banquet and catering, yet GOP only declined by 24.4%, obviously less than the revenue decline, and GOP margin actually increased by almost 500 basis points to 42.6%, even with a significant decline in revenues. And finally, Le Parc, a recently redeveloped all suite residential hotel in West Hollywood. These numbers will help you see the benefit of the new operating model of our urban hotels like this property where occupancies remain challenging. In September, room revenues were down almost 65% with ADR holding up with a decline of just 7.5%. Total revenues were also down 65% as La Parque has a more limited food and beverage offering even in normal times. Yet even with these large revenue declines from September last year, GOP was down just 73%, only slightly higher than the revenue declines. Not only did the property achieve positive GOP in September, but it still hit a GOP margin of 38.8%. While that was down from 49.4% last year, the property team also managed to achieve positive EBITDA with a 14% EBITDA margin. None of these properties could have achieved these bottom line numbers without new operating models coming out of our zero-based budgeting initiative that has significantly reduced costs and created much more efficient staffing levels. Of course, while some of these costs will come back as demand and occupancies recover, many of these efficiencies will stay in place and deliver better results and values over the long term, and they'll also speed up the recovery to 2019 EBITDA levels. I also wanted to point out that our independent and small brand lifestyle properties continue to outperform our major branded properties at both the top and bottom lines. Our hotels cater to the one major segment that continues to be healthy, leisure travel. The unique design and experiences that we can provide and the smaller, more personal nature of our properties continue to be a strategic benefit for our portfolio. These properties are also more flexible when it comes to quickly changing operations and adapting to evolving customer desires. They're also able to move faster in reducing costs, yet still deliver an attractive product to the customer, both of which have been very beneficial to delivering favorable bottom lines at these low demand levels. With 39 of our 53 properties now open, we will reopen the remaining properties as demand recovers and economics dictate. As we've said repeatedly, we will reopen each hotel when we can lower our losses by being open. This varies by property and by market. With the coming winter and the decline in demand that is typically associated with colder months such as November through February, we currently don't anticipate opening additional hotels in San Francisco, Chicago, or New York until sometime next year. We do continue to evaluate the two remaining suspended hotels in Portland and Washington as demand recovers. We're also doing everything we can to accelerate this reopening process, including hunting for additional contract business like airline cruise, which we otherwise wouldn't have previously taken due to lower rates. However, for the next year or two, we believe They'll be financially attractive in most situations. And we've had some luck in that area, which should help reduce our cash burn as airline travel further recovers. As we noted last quarter, we also had luck with attracting university contract business for student residences at two of our hotels in Boston, and we continue to search for similar business in Boston and elsewhere. Over the next few years, we would expect our hotels to outperform their specific markets, similar to what they did last year and early this year before the pandemic struck. Being able to dip down and compete with lower price point hotels and be successful with contract business only happens because our hotels are of high quality, are in good locations, and are in very good condition. and our hotels are in better condition than most of our hotel competitors in our markets. And that difference can be expected to widen as we continue to maintain our hotels and many competitive hotels are starved of capital investments as they struggle to survive. 40 out of 53 of our properties have undergone major renovations, redevelopments or transformations in just the last five years. nine in just the past few quarters, and 10 in 2018. This will be a big advantage over the next few years. We're also currently planning to move forward with a $10.5 million renovation of the luxury Lobears Del Mar Resort commencing late this year. We've completed the design, we've received all required approvals from the city, and believe that dramatic improvements to all of the public areas and guest rooms and the creation of additional outdoor venues will enhance what is already a very high-rated, successful luxury resort in Southern California. The decision to move forward with additional redevelopments in our portfolio will be made on a case-by-case basis and will depend not only on the recovery of the properties and their markets, but the timing of the receipt of final public approvals for each project as well as the pace of the economic recovery and our own recovery. When we think about the remainder of the fourth quarter and the first quarter of next year, these next four to five months are challenging to forecast given the lack of relevant historical demand trends to guide our forecasts. In addition, we must consider the potential negatives related to the recent increase in COVID cases throughout much of the U.S. that we're currently experiencing and what many have been previously forecasting as a difficult second wave, as well as the reactions by many states and cities to expand travel-related quarantines and rollback operating guidelines for some businesses. These negative factors increase the uncertainty as we look out over the next several months. Given that November is traditionally the beginning of the seasonally slower travel period, we think it'll be difficult to continue to grow nominal revenues through much of the winter. And depending upon what transpires with the pandemic, they may soften somewhat from the September-October periods as they've done historically. This means we're more likely to achieve portfolio-wide Hotel EBITDA losses at the less attractive end of our more recent run rate range of minus $5 million to minus $8 million or slightly worse from now until this spring. To be clear, we currently expect that it's likely that nominal industry demand and revenue will soften over the next few months as we enter late fall and winter which is consistent with what normally happens in our industry as the weather becomes less conducive for travel. However, with medical advances likely over these next four to five months, we also think it's likely that we in the hotel industry will see improvements in the recovery as warmer weather arrives in the spring. As we look at the silver lining of potential upside from this crisis, We also expect there will be significant opportunities over the next few years to acquire properties in distress due to a large number of cash-strapped and over-levered owners and many properties that will go back to lenders. As you know, our team has been through two prior crisis-driven opportunistic periods, including one that resulted in the creation of Pebble Brook in late 2009 during the tail end of the Great Recession. Following that crisis, we were able with conviction to fairly quickly and aggressively assemble a 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, Our unique strength in redevelopments and transformations, our vast number of operator relationships, and our high profile and positive reputation in the industry, we believe will have significant competitive advantages as opportunities arise over the next few years. We continue to spend significant time on the best ways to approach and structure our efforts to take advantage of these opportunities. as they come about. Finally, it's safe to say we all find ourselves in uncharted territory with an almost complete lack of clarity about how the future will play out. We remain encouraged by the slow yet consistent recoveries in travel, in our industry, and in our business that are currently underway. It'd be great if the recovery was faster, but we prepared for a lengthy and challenging recovery from the beginning of this pandemic. We continue to be confident that our entire team's experience, reputation, foresight, creativity, work ethic and track record combined with strong corporate liquidity and a fantastic portfolio will allow us to not only grind through the current challenges but thrive during the recovery and the next upcycle. So with that, we'd now like to move on to your questions. Christine, you may proceed with the Q&A.