Pebblebrook Hotel

Greetings and welcome to the Pebble Brook Hotel Trust fourth quarter and year-end 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, please press star one on your telephone keypad. 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. Please go ahead.

Thank you, Donna, and good morning, everyone. Welcome to our fourth quarter 2021 earnings call webcast. Joining me today is John Bortz, our chairman and chief executive officer. But before we start, a reminder that many of our comments today are considered forward-looking statements under federal securities laws. These statements are subject to numerous risk uncertainties as described in our 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, February 23rd, 2022, and we undertake no duty to update them later. We'll discuss non-GAAP financial measures during today's call. We provide reconciliations of these non-GAAP financial measures on our website at pebblebrookhotels.com. While 2021 was another challenging year for the hotel industry in Pebble Brook, we made significant progress on our road to recovery. We thank our hotel teams and operating partners for their hard work, sacrifices, and creativity over the last two years. Our portfolio continues to benefit from their tremendous efforts as we enter the recovery and growth phase following the pandemic. For 2021, our same property hotel revenues increased by over 280 million, or 65% versus 2020, with hotel EBITDA at a positive 132.1 million. This marked a tremendous improvement from 2020 when our hotel EBITDA was negative 27.5 million. Our adjusted EBITDA finished at 88.3 million compared with negative 69.7 million in 2020. Again, considerable progress from a year ago. And while we still have much work ahead, we believe we have considerable upside to come. Adjusted FFL per share ended 2021 at a negative 32 cents, a substantial improvement from 2020 at negative $1.46 per share. And during the second half of 2021, we generated positive adjusted FFO of 22 cents per share, illustrating a trajectory of rapid improvement and growth that started this past summer. On the investment side, we are very active. We completed over 270 million of asset sales comprising two hotels in San Francisco and one in Manhattan. We invested these proceeds and more into 492 million of acquisitions across four leisure-focused resorts with significant upside opportunities. We are excited about the many operating, re-merchandising, and redevelopment opportunities at all four of these properties. On the capital side, we raised more than 740 million in 2021, increasing our liquidity and acquisition capacity. We replaced 250 million of preferred equity with less expensive preferreds, saving 1.8 million annually in preferred dividends. In addition, we extended over $1 billion of debt maturities, further enhancing our liquidity and eliminating any significant debt maturities until late 2023. At year end 2021, we had $730 million of liquidity, including $92 million of cash on hand and nothing drawn on our $650 million unsecured credit facility. Turning briefly to our fourth quarter results, same property total revenues of $245.4 million were 29% below the comparable period in 2019. marking our best quarter versus 2019 since the pandemic. This strength is driven by continued robust demand at our resorts and further improvements in business travel, both group and transient. Total revenues at our resorts climbed to a level 11% higher than 2019's fourth quarter, primarily due to dramatically higher room rates, which are up a whopping 43% to 2019. Our urban hotels continue to show further improvement with same property revenues down 44% in the fourth quarter versus 2019, the best performing quarter since the pandemic. Most encouraging were the trends we saw in December throughout the portfolio, despite the negative impacts of Omicron. Same property total revenues in December were down just 18% compared with December 2019, the best monthly performance since the pandemic, with same property ADR up 20% and same property hotel EBITDA down just 9% compared with compared with December 2019. ADR for our urban hotels recovered by the end of December 2021 to be ahead of 2019, December 2019, by 1.9%. Our monthly same property ADR exceeded the comparable month in 2019, four of the last six months in 2021, despite the disruption caused by the Delta and Omicron variants. This highlights the increased ability of our portfolio to surpass 2019's ADR throughout 2022, earlier than we thought possible just a few months ago. And we are increasingly confident we will reach 2019 hotel EBITDA levels later in 2022. These trends are encouraging. However, these improved expectations assume no additional significant waves of the pandemic. Our ADR gains in Q4 compared with Q4 2019 were impressive at many of our properties. The Bears Del Mar was up 70% or $273. Marker Key West was up 53% or $179. Southernmost Key West was up 48% or $177. And La Playa Beach Resort Naples was up 38% or $143. Each of these resorts have been renovated recently. At our new acquisitions, ADR was up 42% or $110 at Margaritaville Hollywood Beach Resort, and up more than 36% or $77 at Jekyll Island Club. Even with these healthy increases in room rates and food and beverage pricing, the feedback from customer reviews has improved at our properties, indicating a favorable price to value relationship. Since the start of 2021, our portfolio-wide TripAdvisor rankings have improved by an average of eight spots. This demonstrates that despite higher prices, Our guests appreciate even more the enhanced quality and experiences from our renovations and the excellent service of our hotel-level employees are providing. We thank our hotel teams and asset managers for this progress in what has been a challenging labor environment. In the fourth quarter, our best performing properties included two of our recent acquisitions, Margaritaville Hollywood Beach Resort, which increased hotel EBITDA by over 225% versus 2019, And Jekyll Island Club increased hotel EBITDA by more than 145%. Our recently transformed San Diego Mission Bay Resort and their recently renovated La Berge Del Mar both more than doubled their EBITDA compared with fourth quarter 2019. In terms of markets, we continue to see healthy recoveries in Los Angeles, San Diego, Boston, and Philly. And our weakest markets continue to be San Francisco, Washington, D.C., Seattle, and Chicago. These trends are continuing into 2022. On the operating expense side, despite the cost pressures most businesses are experiencing, we remain encouraged that our new operating models have made our hotels more efficient and more profitable as we climb back to pre-pandemic levels of demand and revenues. Labor challenges have significantly receded and many of our properties are now well situated from a staffing perspective. The high quality nature of our properties affords the staff at our properties the ability to earn market leading wages and benefits, which gives our teams the ability to attract the best quality associates. The combination of cross training, technology, and clustering of our management teams in markets with multiple properties managed by the same operator has provided significant permanent cost savings on an ongoing basis. And with an ability to raise prices, we feel like we are in good shape to offset future inflationary cost increases. We remain confident that we have eliminated 100 to 200 basis points of expenses at our hotels from our wide array of operating improvements in our operating model. Shifting to Q1 2022 operating and demand trends, we estimate that the Omicron variant significantly reduced revenues in January and February, both due to group and transit cancellations. And a material slowdown in new bookings, especially in January and early February, and especially in business travel. In late December, the JPMorgan Healthcare Conference in San Francisco, which was to be held in early January, was unfortunately canceled and went virtual, costing our portfolio over $6 million in total revenues. Unfortunately, the vast majority of city-wide and group meetings scheduled in Q1 that were canceled throughout our portfolio have been or are rebooking into Q2 or later in 2022 and have done so at higher rates. This indicates corporations and other businesses ardent desire and need to hold their meetings in person. January same property total rep bar was down an estimated 43.8% versus January 2019. This was a very challenging month. However, we are encouraged about the rapid improvement we were seeing for February and March. We think same property total rep bar for Q1 could come within one or two points of Q4 as compared to the same quarter in 2019, despite the significant impact from Omicron in January and February. We currently expect March to return to the recovery trajectory that we were experiencing before Omicron, and we're already seeing a significant acceleration in business travel bookings for March and beyond. This is expected to result in Q1 same-property total revenue, or REPAR, down 30% to 35% to 2019, with same-property hotel EBITDA between $25 million and $35 million and adjusted EBITDA between 14 and $19 million. We are forecasting a Q1 adjusted FFO per diluted share loss of 11 to 15 cents, which compares favorably to 2021 Q4 adjusted FFO of negative 42 cents per share. We expect the first quarter to be the only negative FFO quarter for the year as we expect return to profitability again in Q2 and for the balance of 2022. This is the first time since the pandemic that we're confident enough to provide a quarterly outlook, indicated our increased comfort level with the visibility and stability in near-term operating trends. Of course, these assumptions assume no additional outbreaks from the pandemic. Please note that starting in Q1, we will be adding back the amortization of non-cash stock compensation to both our adjusted EBITDA and adjusted FFO results for the current year and for the comparable period last year. We're making this change since most of the hotel REITs and all of the hotel C corps report their EBITDA and FFO in this manner. So this change will make us more comparable with industry practice. Shifting to our capital improvement program, during 2021, we completed 83.8 million in capital investments and redevelopment projects. This includes six significant renovation and re-merchandising projects representing 53.4 million of the capital we invested in 2021. Since 2018, we've invested approximately $350 million into redevelopment and transformation projects at 25 different properties. We expect these projects to generate 10% or better returns as demand returns and performance stabilizes over the next two to three years. For 2022, we have $100 to $120 million of capital investments planned, of which $80 million accounts for the major redevelopments and smaller ROI projects. In 2022, we'll have Eight significant renovations and redevelopment projects either underway or starting later this year, including the transformations of Vitali to One Hotel San Francisco, Grafton on Sunset to Hotel Ziggy, our next unofficial Z Collection Hotel, and Solomar to Margaritaville San Diego Gaslamp District. Major repositions at our newly acquired Jekyll Island Club Resort and Estancia Hotel and Spa in La Jolla will start later this year, as will long overdue major renovations and upgrading of the Hilton Gassman Quarter and the second and final phase of repositioning Viceroy Santa Monica and following whatever governmental approvals come through, the transformation of Paradise Point Resort and Spa to Paradise Point and Margaritaville Island Resort San Diego. We're very excited about these projects and expect they will drive significant EBITDA growth and value creation. With that, I would now like to turn the call over to John. John?

Thanks, Ray. I'm going to try to be reasonably brief and pointed so that we can get to the Q&A. Demand has firmed since the January pullback. Business travel, which took a break in January from a material recovery in the fourth quarter, is noticeably improving. Citywide and larger business group meetings are happening. Group lead volume, site tours, and bookings have increased substantially in the last few weeks. Most groups that canceled for January and February have rebooked and done so at higher rates. February is turning out to be much better than we expected just a few weeks ago, particularly the second half of the month. We expect same property revenues to be down between 25% and 28% versus 2019. Pickup in March has accelerated in just the last two weeks. Both holiday weekends in February turned out well, and Super Bowl in L.A. for us added $3 to $4 million as we achieved around 90% occupancy of our 1,786 West L.A. rooms at a rate of around $800 per night for four nights. Our revenue management teams did a terrific job. We're seeing a significant increase in business transient and group travel as Omicron recedes and masking and vaccine mandates are relaxed or eliminated. We believe there is significant pent-up business demand to aid a continuing robust level of leisure demand, and there is currently little to no price sensitivity from either leisure or business customers. We're very optimistic about an accelerating recovery in business travel over the next three to four months, and we're already seeing it for March and April. And we're extremely excited about the potential growth in occupancy and rate in particular over the next few years. There will be limited new supply over the next three to four years in our industry, particularly in cities and resort markets, and that will provide a great long runway for occupancy and rate growth. Hotel starts are at low levels and will be for at least another year. Rooms under construction are declining and development costs have climbed dramatically in the last two years. Any large new hotel development like urban high-rise hotels or resorts are now taking 36 to 42 months to complete from shovel in the ground. Replacement costs have climbed dramatically from pre-pandemic levels, up 25 to 35%, and 20% plus in 2021 alone. Urban and resort land costs have also climbed significantly. After a great deal of research and effort, We estimate that our portfolio's replacement costs have increased to between $700,000 and $750,000 per key. When we look at performance in our portfolio, our resorts continue to lead the way. Our resorts, particularly those in the southeast, are on pace to far exceed their EBITDA in 2019. For Q4, those southeast resorts exceeded Q4 2019 by $8 million, or 61%. And all 11 resorts combined are on pace to achieve a trailing 12-month same-property EBITDA by the end of Q1 of approximately $150 million. That's up $32 million, or 27%, from 2019. Combined EBITDA from all 11 resorts in Q4 exceeded Q4 2019 by $11.2 million, or 54%, with ADR up $109, or 43%, and RevPar climbing $37 higher, or 20%. We continue to be very focused on taking advantage of pricing power and a lack of pricing resistance, not just for rooms, but for F&B, banquets and catering, parking, resort fees, and service and administrative charges. This will help us get back to 2019 bottom line numbers sooner, though we clearly still have a ways to go. July 2021 was the first month we exceeded 2019 rates. Q4 2021 was the first quarter we exceeded 2019 rates. And now we're increasingly confident 2022 will be the first full year we'll exceed 2019 rates, even as we regain occupancy from business travel throughout the year. In Q1, January is estimated to have beaten 2019 same property ADR by over $25 and over 10%. February ADR is on track to exceed 2019 by approximately $50 or 20%, with about $16 or seven points of it due to Super Bowl. March is looking like it could also exceed 2019 by 10% or more. Our acquisitions have far exceeded our underwriting And the annualized 2021 returns were terrific. A 7.2% NOI yield for Margaritaville, an 8% NOI yield for Jekyll Island Club Resort, and 3.4% for Estancia, La Jolla, which we acquired on December 1. When we look at the trailing 12 months through Q1 this year, we're forecasting Margaritaville at 8.4%, Jekyll at 8%, and Estancia at 4.6%. This is all before any physical improvements, but it does include benefits from operating changes we've already implemented with our operators. As Ray said, we've invested almost $350 million in transformational redevelopments and major renovations in 24 properties since 2018. including 16 properties acquired through the LaSalle transaction in late 2018. This is a big deal and was a lot of work. The increased performance from these projects will substantially increase our performance over the next few years, and we're already seeing it at our resorts where we've seen demand recover. In addition to these major projects, We also have numerous smaller ROI projects throughout the portfolio, such as converting the pool on the rooftop of Revere in Boston to additional indoor-outdoor event space and adding a resort pool to Chaminade Resort in the Santa Cruz Mountains to continue the transformation of this former conference center to a more amenity-focused leisure and group destination. We're adding a new leased restaurant at Mondrian in West Hollywood, completing the property's recent $19.5 million redevelopment to return it to its former glory on Sunset Boulevard. And we're undertaking a comprehensive rooms renovation at Viceroy Santa Monica to complete a $115,000 per key or $19.5 million repositioning of this iconic luxury urban resort. We're also adding five keys at La Meridian Delfina Santa Monica, creating them out of unused storage rooms and offices. And then there are two major multi-year projects we've been working on now for several years, and both involve the master planning of significant unused acreage at former conference centers. Skamania Lodge in the Columbia River Gorge and Chaminade Resort in Santa Cruz. With the incredible success of the outdoor pavilion and six tree houses we added at Skamania in the last five years, and the trend of consumers looking for increasingly experiential lodging alternatives, we believe we have the potential to add as much as a couple hundred units of alternative lodging at both properties, including tree houses, glamping, spaces for luxury RVs, cabins, villas, farmhouses, and additional outdoor activities. This year at Skamania, as the first step in this master plan, with a $10 to $12 million investment, we expect to commence adding three more tree houses, five luxury glamping units, a multi-bedroom villa, and a large outdoor pavilion that will host additional business and social events adjacent to our recently completed and already very popular 18-hole putting course. So I'm sure you can tell we're feeling some good vibrations. So now we'd like to move to the Q&A portion of our call. So Donna, you may now proceed.