Pebblebrook Hotel

Welcome to the Pebble Brook Hotel Trust first quarter earnings conference call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If you would like to ask a question, you may press star 1 on your telephone keypad. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Raymond Martz, Chief Financial Officer Thank you, sir. Please go ahead.

Thank you, Donna. And good morning, everyone. Welcome to our first quarter 2021 earnings call and webcast. Joining me today is John Bortz, our Chairman and Chief Executive Officer. But before we start this morning, quick reminder that many of our comments today are considered forward-looking statements under federal securities laws. These statements are subject to numerous risk and uncertainties as described in our 10-K for 2020. Our other SEC reports and future results could differ materially from the those implied today by our comments. Forward-looking statements that we made today are effective only as of today, April 30th, 2021, and we undertake no duty to update them later. Our SEC reports and our earnings release contain reconciliations of the non-GAAP financial measures we use, which are available on our website at pebblebrookhotels.com. When discussing our financial and operating results, we will in many cases also compare our first quarter results to the first quarter of 2019. We believe this is a more accurate representation of the comparable operating and financial performance rather than comparing to 2020. We provided these comparative performance measures for 2021, 2020, and 2019 in the financial statement tables as part of the press release we filed last night. Okay, on to the highlights of the first quarter. Last year this time, hotel demand was virtually zero. We only had eight of our hotels open. We were burning between $25 and $30 million of cash per month, and we also had about $450 million of liquidity. Today, about a year later, we have 48 hotels open, 11 more than when we started the year, and eight more since last quarter. In March, for the first time since the pandemic began, we achieved positive hotel EBITDA for the month. This exceeded our expectations due primarily to greater pickup in March from an extended spring break. Our total corporate cash burn in March was approximately 12 million, a significant improvement from January and February when we averaged over $21 million per month. And today we have over $900 million of liquidity. Progress on vaccinations combined with significant pent-up leisure travel demand provides us with more confidence and optimism in the path of recovery despite business travel and group demand still way off pre-pandemic levels. The crisis is far from over. but the hotel industry and our portfolio are heading in the right direction. And trends are improving monthly, which is very encouraging. As our song from the 70s indicated, yesterday is gone and tomorrow should be better. Same property total revenues of 83.2 million were 74.7% below the first quarter of 2019, but marked a 12.3% improvement from the fourth quarter of 2020 with revenues of 74 million. You'll recall when we spoke two months ago, we thought the first quarter would be slightly below the fourth quarter. Total hotel level expenses of 99.3 million were reduced by 58.5% versus Q1 2019. Expenses before fixed costs like property taxes and insurance were cut by 66.6% versus Q1 2019. Our total property level expense reduction was 78% of the revenue decline and 89% before fixed expenses. This highlights the tireless efforts of our operating and asset management teams who have been focused on maintaining enhanced cleaning and safety protocols for our guests and hotel team members, while also instituting cost controls and implementing new best practices to improve efficiencies. Our hotel operating teams are also trying to overcome the challenge we are experiencing with a lack of available workers in every market. We expect the shortage of hotel workers to remain a challenge for several months, but improve in September. As enhanced unemployment benefits are due to run out, children should be back in school full-time, and the fear of the virus is dramatically reduced due to widespread vaccinations. On a same property route part basis versus a comparable period in 2019, January was down 83%, February was down 76.4%, and March was down 70.2%. which represented the best performing month since the pandemic started last March. For the second quarter, we currently expect RepR to be down between 66 and 70% compared with the comparable period in 2019, which continues the improving trend. Our total portfolio generated 19.4 million of revenue in January with 37 hotels open, 26 million in February with 38 hotels open, and 38.1 million in March with 39 hotels open. We forecast revenues of approximately 42 million for April, slightly up for March with 44 hotels open. That 44 excludes the additional four hotels we reopened near the end of the month. Please keep in mind that as these last hotels reopen, they open with lower occupancies and they're reopening in lower occupancy and slower recovering markets. So ADRs also will be at lower levels. So they weigh down our overall statistics but increased our total revenues and hotel EBITDA numbers. For the first quarter, same property hotel EBITDA was negative 16.1 million compared with a positive 89.4 million from Q1 2019. However, it does mark an improvement from the fourth quarter of 2020 when we had a hotel EBITDA loss of 19.1 million. By month, same property hotel EBITDA was negative 11.4 million in January, negative six million in February, and positive 1.3 million in March. Our eight resorts have been the consistent bright spot in a portfolio throughout this pandemic, whether summer, fall, winter, or spring. They generated a positive $14.5 million of hotel EBITDA in quarter. This resulted from an occupancy of 41% and an average daily rate of $406, which was more than $93 and a 30% increase over the comparable 2019 first quarter. Vend at our resorts was also up meaningfully over the comparable period in 2019, resulting in total revenue per occupied room higher by more than 10%. 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%. Not only do our drive-to resorts benefit from strong leisure, but all of our urban markets have strong leisure components. and markets like San Diego and Los Angeles are benefiting now. Washington, D.C., Boston, Seattle, Portland, San Francisco, Chicago, and Philadelphia should also benefit from this summer assuming the amenities and tractions are open in those markets. Our adjusted EBITDA was negative 25 million in the first quarter compared with a positive 90.5 million in Q1 2019. Despite the seasonally slower first quarter, This is an improvement compared with the negative 27.9 million of adjusted EBITDA for the fourth quarter ending December 31st, 2020, and shows a positive direction of the portfolio. Adjusted FFO per share declined to a negative 42 cents per share compared with a positive 46 cents per share in Q1 2019. Shifting to our capital improvements, during the first quarter, we invested 9.6 million in our portfolio. About a third of this capital was related to the redevelopment of La Berge in Del Mar, California. This transformation is expected to be completed several weeks, and the new lobby, outdoor restaurant, new cafe, and renovated rooms have reopened. For 2021, we anticipate investing an additional $60 to $80 million for a total of $70 to $90 million in our portfolio. We've decided to move forward on the $25 million redevelopment of Hotel Vitality in San Francisco into the one hotel. We will start this renovation later this summer and target to complete it by year end. As a result, we will keep Hotel Battaglia closed for the rest of this year to complete the redevelopment and transformation with less disruption than if the hotel was open. This will also allow us to complete the renovation more quickly and at a lower cost. We will also be moving forward on the $5 million redevelopment and renovation of the Grafton on Sunset in West Hollywood, California. We expect to start this renovation in the fourth quarter with completion in the first quarter of 2022. We will relaunch this hotel as the eighth member of the unofficial Z collection upon its completion with the new Z name yet to be finalized. Our decision to ramp up our reinvestment projects are a very positive indicator of our confidence in the direction of the travel recovery that is beginning to take hold and our strong overall financial condition and resources. We want our hotels to be in a position to take advantage of the substantial step-up in travel and hotel demand that we expect in 2022 and beyond, which is why we are moving forward with these renovations, which are transformational and should lead to outsized cash flow growth. Shifting to asset dispositions, on April 1st, we announced we completed the sale of the Sir Francis Drake Hotel in San Francisco. We generated approximately 157.6 million proceeds from the sale. Since the second quarter of 2020, we completed approximately $225 million of property dispositions. We intend to strategically reallocate this capital into new investment opportunities that we believe will provide enhanced returns and greater diversification for our portfolio as the opportunities become available. Turning to our balance sheet and liquidity, with the proceeds from the recent sale of the Sir Francis Drake, we have more than $920 million of liquidity. This includes cash of $279 million and $643 million available under our unsecured credit facility. Our net debt to book value is approximately 42% and excluding our convertible notes, which can be converted to common equity when our common share price exceeds $25.47 per share, this ratio is 27%. We're proud of the tremendous progress we've made strengthening our balance sheet, reducing near-term debt maturities, and increasing our liquidity. This should allow us to take advantage of new investment opportunities as they become available. With that, I now turn the call over to John. John? Thanks, Ray.

So I thought I'd focus on what we're currently seeing in our business and how we think this year is likely to play out now that it seems we have perhaps a more predictable path, though it continues to be a path with quite a lot of uncertainty. None of us has ever been through a pandemic. So the big variables include the progress we make against the virus, both here and around the world, and then how governments, individuals, and businesses in particular behave as the health issues recede, assuming we have no setbacks. We're certainly very encouraged by the reduction in our country's daily cases, hospitalizations and deaths, and the pace and general level of vaccinations. This year's recovery is being led by the leisure traveler who continues to be most of the demand currently traveling. While all segments will increase as the year goes on, leisure travel is a segment that is likely to remain the driving force behind the recovery for the second and third quarters as government restrictions ease and as more and more people feel safe and comfortable traveling. In fact, We've already seen the leisure recovery pick up speed since the beginning of the year when it was at its low point. Not only did occupancy pick up in February and March, but overall bookings consistently increased through the entire first quarter, including for future months. For us, demand consistently increased throughout all of our markets. For example, total hotel revenue per day in February averaged about 49% higher than in January, and March increased another 32% from February. And April is forecasted to be up another 17% from March based on the first 25 days of the month. Room revenues have improved even more. Average daily room revenues increased 55% from January to February, another 35 percent from February to March, and we're forecasting they'll be up another 17 percent from March to April, again, based on the first 25 days of the month. While the nominal numbers are still very low, averaging about $1.2 million per day in March for total revenues, the improvement in transit demand and occupancy have clearly been significant. Except for periods following holidays, our total transient bookings have increased week over week just about every week this year. We're also encouraged that we're seeing forward transient bookings pick up as well, as the leisure customer feels increasingly confident booking vacations and leisure trips further out than they've been doing so far during the pandemic. When it comes to rates, We've seen consistently strong growth in ADRs at our resorts, with seven of eight of them achieving significant increases over 2019 levels. In the first quarter, average rate at our resorts on a combined basis increased $93.88 over 2019's first quarter, or a whopping 30.1%. Weekday rate growth at our resorts was even stronger than weekend rate growth, up 31.5% on weekdays versus 20.6% on weekends. The leisure customer has plenty of money to spend, and a greater number are choosing upgraded and more expensive room types, including view rooms and suites, and this is helping to increase average rates. While the same cannot be said for rate growth at our urban hotels, The strength of our resort portfolio has been so great that it dramatically mitigated the urban rate decline of 31.5%. This decline was less on the weekends than on the weekdays. Not surprisingly, given our traditional weekday high-rated business in our urban markets comes from citywide conventions, corporate group, and business transients, all segments traveling in a very limited amount during the first quarter. Yet because of the huge rate increases in our resort portfolio, the entire portfolio only experienced a 4.7% rate decline from 2019's Q1. And we continue to focus our revenue management efforts on recovering ADR in our urban markets, particularly as demand improves. During last September and October, we saw the beginnings of a modest recovery in business travel. However, with the rise in the virus's spread, increased government restrictions, and the arrival of winter, transient business travel slowed significantly in the first half of Q1. We're encouraged that we've begun to see some business travel return again. Some examples include TV, movie and music production in LA, consultants, health care, pharmaceutical, and IT-related project travelers in various markets, including Boston, and some government, as well as sports and entertainment throughout the portfolio as those event venues reopen again with spectators and fans. We've also had some corporate groups actualize, primarily in Florida, including incentive groups and strategic planning meetings. We expect to see a gradual improvement in business travel over the course of the year, but we don't really expect a major increase until after Labor Day in early September. Growth in business travel between now and Labor Day will likely come from private businesses and small to medium-sized public companies. We've also hosted many social groups at our properties, especially related to weddings. In fact, wedding bookings for the second half of the year continue to pick up, and we may see a record number of weddings in the second half. In the first quarter, group accounted for 10.2% of our total room revenues. This does not include the university student business at the WBoston, but does include airline crew business throughout the portfolio, representing over 4% of total room revenues. Corporate group represented a little over 2% of total room revenues in the quarter. There are also a significant number of groups that have or intend to rebook into the second half of 2021 and into 2022 as well. We're very encouraged about how well Group is shaping up for 2022 at this point. While 2022 PACE continues to be significantly behind the PACE in 2018 for 2019, not surprisingly, it's down 28% in room nights. Activity has definitely picked up as meeting planners return to work and become more confident about holding meetings. There's more clarity and optimism on success against the virus, with restrictions on meetings being loosened or dropped altogether, and that's providing more comfort that groups will be able to meet or hold their events after they do book their business. Equally encouraging is that rate is holding as well. Our group rate for 2022 is currently ahead by 3.8%, versus the same time in 2018 for 2019, which was our last normal pre-pandemic year. When we look at the second half of 2021, we're definitely much more cautious about group and trying to forecast when businesses will move forward and meet in person. In the last four months, we're encouraged by the continuous improvement in activity related to the number of leads, site tours, discussions, and group bookings throughout our portfolio. Nevertheless, overall activity levels, especially bookings, are not yet at the levels of 2019, and they certainly vary meaningfully from market to market. Our group pace for the second half of 2021 is down roughly 45%, with ADR about flat, which is very encouraging. Group rates have generally held up or been rolled forward from previous bookings, and some have even increased if they've moved from a seasonally lower rated time of year to a seasonally stronger time of year. We certainly hope group will begin to pick up as the year moves along and progress continues against the virus. However, we're concerned that businesses will be more cautious about meeting this year, particularly before Labor Day. There are glimpses of hope, however, including the concrete citywide to be held in Las Vegas in June. Seems like a pretty scary idea, concrete in Vegas. Nevertheless, we should go forward. We have the ALICE convention scheduled for late July in LA, which should go forward if California and LA reopen. as announced and allow such a large conference. And I'm sure there are many other examples, so we'll get a better view of the willingness of business travelers to attend meetings, conferences, and conventions later in the second quarter. From an expectations perspective, if we assume continued progress against the virus, we believe the second quarter should be better than the first quarter. We should be able to achieve not only positive hotel EBITDA, but we should be able to generate positive corporate adjusted EBITDA for the quarter. And with further progress in the second half of the year, we're hopeful that we can eliminate our operating cash burn and generate positive adjusted FFO sometime in the third quarter. One important item about the first quarter I want to point out. Previously, we had indicated that we believed we needed to get to 30% to 35% occupancy in order to get to break even for the portfolio. In March, we achieved a positive $1.4 million of hotel EBITDA at an occupancy level of just 24.7%, obviously much lower than our prior estimates. So think about that, profitability at an overall occupancy level less than 25%. Pretty remarkable, I think. This very positive result was primarily due to a pretty healthy portfolio-wide average rate of $245, as well as our new operating models throughout our portfolio. While this average rate in March benefited from prime season rates in South Florida, that will come down as we move out of high season. Our average rate will be helped by increases in rates at our other resorts on the West Coast as they move into prime season in Q2 and Q3, and as we benefit from the redevelopments that recently took place at Mission Bay Resort, Chaminade, Skamania, Lobert's Del Mar, La Playa, Marker Harborfront Resort, and Paradise Point. That's all of our resorts except southernmost resort, which will undergo a major renovation this summer. In addition, most of our urban markets will be moving into stronger leisure months as we move into the middle of the calendar and into and through the summer, hopefully just in time for business travel to accelerate in the fall. So we're very optimistic that our overall operating model is much improved and should allow for enhanced results as revenues continue to recover. When we think about 2022, we're focused strategically on the year being a very strong recovery year overall. Groups should be as strong as we believe there's a great deal of pent-up demand, and it will also benefit from all the meetings being rebooked from 2020 and 2021. We also think leisure will continue to be robust with a lot of pent-up demand for vacations and getaways and outbound international probably still more limited. This means we don't expect significant rate discounting in 2022. Again, this is with the obvious caveat that we get to relatively normal behavior by the end of this year and it remains relatively normal next year. We believe we're in a great position to take advantage of this recovery in 2022 and beyond, based on the outstanding condition of our hotels and resorts. As we've reported, we're moving forward with the redevelopment of Southernmost Resort in Key West this summer, Vitale into a one hotel in San Francisco in the fall, Grafton into an unofficial Z Collection hotel in West Hollywood, also in the fall, and we're completing Lobert's Del Mar next month. As it relates to the few remaining redevelopment projects we deferred due to the pandemic, we're continuing to complete plans and permitting, and we'll pull the trigger on these projects when we have more clarity on the recovery and progress against the virus. Specifically, as it relates to the $37 million redevelopment and transformation of Paradise Point in San Diego's Mission Bay into a Margaritaville Island resort, we're still working our way through discussions with governmental authorities. At this point, we don't expect to be able to start construction until at least late this year, assuming we get the necessary approvals in the next six months. All of these completed redevelopments and transformation, including the large number in the past few years, and all of the upcoming projects and improvements will provide significant upside for our portfolio over the next few years as the recovery takes hold and rolls forward. Importantly, the vast majority of the dollars for these projects have already been invested. As we look at the silver lining of potential upside from this crisis, we 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. In this regard, we're actively looking for opportunities to reinvest the dollars from the hotels we've sold over the last 12 months. We believe we have significant competitive advantages as opportunities arise over the next few years. These include our ability to operate properties more efficiently than the vast majority of buyers, the additional cost benefits from the additional economies of scale that can be generated from Curator, our unique strength in redevelopments and transformations, as well as with independent or small brand lifestyle hotels. our vast number of operator relationships, and our high profile and positive reputation in the industry. We're confident that our industry and our portfolio are currently on a path to recovery that is becoming increasingly clear. And we believe we've got the team, the portfolio, the knowledge, and the experience to perform exceedingly well in this recovery. And we appreciate your patience, your support, and your confidence in us. And with that, we'd now like to move on to questions. Donna, you may proceed with the Q&A.