Pebblebrook Hotel

Greetings and welcome to the Pebble Brook Hotel Trust First Quarter Earnings Conference. 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 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, Raymond Marth, Chief Financial Officer and Thank you. Please go ahead.

Thank you, Donna. And good morning, everyone. Welcome to our first quarter 2022 earnings calling 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. Future results could differ materially from those implied by our comments. Forward-looking statements that we make are effective only as of today, April 27, 2022, and we undertake no duty to update them later. We'll discuss our non-GAAP financial measures during today's call and provide reconciliations of these non-GAAP financial measures on our website at publicreportals.com. Okay, so last night we reported our Q1 results, and they significantly exceeded our expectations from just 60 days ago. Versus Q1 2019, same property report was down just 23.4%, with average daily rate up 19.4%, and non-room revenue per occupied room up 19.6%, demonstrating our continued ability to drive room and non-room price increases across the portfolio to offset cost pressures. Same property revenues recovered 76.8% of 2019, and same property hotel EBITDA recovered to 61% of Q1 2019, marking our best quarter compared to 2019 since the pandemic. Even more encouraging were the rapidly improving demand trends as the quarter progressed. The first half of the quarter was negatively impacted by Omicron. Demand started to reaccelerate in February, first with strong leisure demand aided by the Super Bowl in early February, which benefited our nine hotels in West Los Angeles, and then with President's Day weekend, which helped our resorts and many of our urban properties. Business demand snapped back quickly starting in February, in a much more substantial and broader way than we expected, and then accelerated further into March. March ended at 62% occupancy, with ADR up 19.7%, resulting in same property revenues only 9% below March 2019. Same property hotel EBITDA for March was also down just 9% to 2019, and hotel EBITDA margins were up 12 basis points. Pretty amazing bottom line operating results considering occupancy was down about 20 points to 2019. This points to a lot of upside going forward as more business travel demand returns with favorable operating leverage yet to be realized in the portfolio. The accelerated operating trends are being driven by an expanding number of demand segments and an increasing number of markets. Leisure continues to be robust, which we expect will continue as we get into the heavier leisure travel season later in the spring and summer. We haven't seen any pullback in leisure demand or spending levels due to rising gas prices or inflation. And we wouldn't expect much impact given the type of leisure traveler at our upper upscale luxury hotels who is in a strong financial position and is generally less impacted by these factors. Resurging and pent-up business travel, both transient and group, have been the most significant positive surprises in Q1. Not only are they recovering, but doing so at a faster pace of recovery than what we were forecasting. These trends are accelerating in the second quarter with strong booking trends and increasing rates. Group bookings, leads, and site visits have increased substantially over the last 90 days. And the booking window for both leisure and group has been stretching out. These trends are continuing into Q2 and for the balance of the year. These improvement demand trends are evident in our occupancies at many of our urban hotels when comparing January to February. Our hotels in West L.A. increased occupancy from 34% in January to 67% in March. Boston went from 55% to 81%. San Diego from 42% to 76%. Seattle from 16% to 45%. Portland from 25% to 45%. D.C. from 15% to 39%. and San Francisco from 14% to 36%. Much of these increases were driven by increases in weekday demand, which indicates a healthy recovery in business travel. Based on our current pace for April, these occupancies should rise further, another four to five occupancy points, despite the negative impact of Easter and Passover in April. And occupancies should continue to improve during the rest of the quarter. These are very positive trends. We're also encouraged by the strong ADR growth we've generated, which bodes well for the remainder of the year. For our resorts, ADR was up 29.1% from Q1 last year, and 59.4% compared to Q1 2019. This was led by LaBerge Del Mar up $359, or 103%, Marker Key West up $258, or 62.4%, Chaminade in the Santa Cruz Mountains was up $126, or 62.6%. Southernmost Key West was up $283, or 62.6%. And La Pai Beach Resort in Naples was up $332, or 60.6%. All five of these resorts were recently renovated and have gained ADR share, demonstrating the success we're having generating much higher room rates that, not surprisingly, flow extremely well to the bottom line. Across our portfolio, we generated 22.4% higher non-room revenues per occupied room in Q1 versus 2019, demonstrating our ability to drive higher non-room spending, even with much lower business group levels than back in 2019. These results underscore the financial benefits we are beginning to receive by dramatically enhancing the quality of the overall guest experience at these properties, both physically and operationally. And as John will cover later, We have several additional renovation and redevelopment projects underway or on deck to start later this year. We expect to generate outsized revenue and EBITDA gains in future years from these projects, which has been the case with our previous major redevelopment projects. In addition to the strong room rate growth at our resorts, rates were also higher in Q1 2019 than a number of our urban properties. Our rates were higher than they were in Q1 2019. LA was up by 21.5%. over 2019 Q1, Miami exceeded by 23.3%, Chicago was up 5.5%, D.C. was up 4.5%, and Portland was 0.9% higher. We continue to expect ADR growth to be greater than 2019 for all of 2022, led by our resorts, but with an increasing number of urban markets climbing above 2019 as the year progresses. Based on current trends and the increasing visibility of business on the books, Our current outlook for Q2, it's a red part to be down just 8% to 10% versus Q2 2019. Our best-performing properties in the first quarter in terms of EBITDA growth included many of our resorts. Compared to Q1 2019, Jekyll Island Club increased hotel EBITDA by 114%. San Diego Mission Bay was up 227%. Mondrian Los Angeles increased 96%. La Pai Beach Resort EBITDA grew by 59%. Market Key West was up 49%. Southernmost Key West was up 37%. And Margaritaville, Highwood Beach increased 36%. As a result of the much greater than forecasted hotel operating results, our adjusted EBITDA finished at 46.5 million, 50.3% recovered versus Q1 2019, and significantly above our Q1 outlook of 14 to 19 million. Adjusted FFO per share was a positive 11 cents, Also, much better than our outlook of negative 11 to 15 cents per share. Again, this represents considerable progress during the quarter. On the operating side, expense side of the business, despite headline concerns about inflation and rising gas prices, we remain encouraged with our new operating models, which have made our hotels more efficient. We will be more profitable as we climb back to pre-pandemic levels of demand and revenues. Labor challenges remain, but continue to lessen considerably from what we experienced in 2021. More former associates coming back. We've seen far more qualified applicants for available jobs. And we've been able to take advantage of an increase in number of temporary work visas from the administration. So we have far fewer open positions than last year. And many of our properties are now fully staffed. In addition to the high quality nature of our properties, which affords the staff at our properties the ability to earn market leading wages and benefits, This gives our teams the ability to attract the best quality associates. We remain confident that we have eliminated 100 to 200 basis points of expenses from our operating models at our hotels through a broad array of operating improvements. Shifting to our capital improvement program, we invested approximately $20 million in the portfolio during the quarter, successfully completing the renovation and conversion of Hotel Graf and Hotel Ziggy on the celebrated Sunset Strip in West Hollywood. And we will be completing the redevelopment, transformation, and reopening of Hotel Vitality as one hotel in San Francisco later in the quarter. We remain on track to invest $100 to $120 million into the portfolio in 2022 with approximately $80 million of it targeted for ROI redevelopment projects, which we expect will generate cash and cash returns of 10% or higher when these transformed and re-merchandised hotels and resorts stabilize over the next two to three years. On the investment side, last week we announced that we executed a contract to acquire the 119 room in and fifth in downtown Naples, Florida at a purchase price of $156 million. We anticipate completing this acquisition later in the second quarter. This luxury resort property is in excellent condition. It has more than 21,000 square feet of high-value retail space, which we estimate would be valued at $25 to $30 million based on its current annual rental revenue of $1.9 million. We plan to retain Noble House Hotels and Resorts to manage this property at closing. Noble House also manages our La Playa Beach Resort, which is just 20 minutes away, so we expect some significant operating and marketing synergies between the two resort properties. We intend to fund half the acquisition with preferred operating partnership units with a 6% distribution rate and non-call protection for five years, similar to our other preferred equity series that we have previously issued. And turn to our balance sheet. We have no meaningful debt maturities until November 2023. And as of March 31st, we had approximately $694 million of liquidity, including our $611 million unsecured credit facility that remains undrawn. Eighty-one percent of our debt was locked in with fixed interest rates, limiting the impact of rising interest rates on our cash flow. Finally, given the current improving demand trends and Q2 outlook, we expect to exit our covenant waiver period at the end of the second quarter marking another significant milestone in our road to recovery. And with that cheerful note, I'd like to turn the call over to John. John?

Thanks, Ray. As Ray indicated, the trends are very positive coming out of the first quarter and heading into the second quarter. Demand has increased since the January pullback with a dramatic increase in March and a further increase in April. Business travel is noticeably improving. City-wide and business group meetings of all sizes are happening. Attendance is improving and spend per person is strong. Group lead volume, site tours and bookings continue to increase with many of our properties with both group leads and bookings at higher levels than same time 2019 and with bookings at higher rates. These substantial and rapid improvements in business travel have led to significant gains in both our urban occupancy levels and average daily rates. Occupancy for our urban portfolio, excluding one hotel, San Francisco, which has been closed, increased from 32 percent in January to 47 percent in February to 59 percent in March, And for April through the 24th, it increased to 64%. ADR has climbed materially as well, from $198 in January to $245 in March to $265 in April so far. Of course, these occupancy levels are still well below 2019 levels. And with lots of pent-up business demand, we have significant occupancy growth to recover to drive higher operating performance. As Ray indicated, some of the previous urban markets that were slower to recover have been gaining occupancy rapidly, and in all cases, it has continued in April. For example, Washington, D.C., which ran an occupancy of 39% in March, has climbed to 62% in April through the 24th, Seattle in March has gone from 45% to 53% so far this month. San Francisco has increased from 36% to 41%, with a strong last week of April that should bring occupancy to 43%. Our two properties in Chicago should reach an average of almost 50% occupancy in April. Encouragingly, and as evidenced by our first quarter average rate, There continues to be 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 as indicated, we're already seeing it in the second quarter. And we're extremely excited about the potential growth in occupancy and rate over the next few years with limited construction starts and supply growth for the next few years. When we look at performance within our portfolio, as Ray indicated, our resorts continue to lead the way. Our resorts, including the Margaritaville, Estancia, and Jekyll Island acquisitions, are on pace to far exceed their EBITDA in 2019. For Q1, our 11 resorts combined achieved $45.4 million of EBITDA, which is a $12.1 million or 36% increase over Q1 2019. We're currently forecasting that EBITDA for 2022 at our 11 current resorts will exceed their 2019 EBITDA by $50 to $60 million, reaching total EBITDA of between $169 and $179 million. 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. As Ray indicated, and it's worth repeating, non-room revenue per occupied room was 19.6% higher than in Q1 2019. We continue to see very strong spend by business groups and leisure guests, and we expect this will continue throughout the year. As you know, we made three major and one small acquisition last year. These acquisitions have all far exceeded our underwriting, and even though we haven't owned any of these properties for 12 months yet, the trailing 12-month NOI yields on these investments are terrific. A 9.1% NOI yield for Margaritaville, which we didn't acquire until late October. An 8.5% NOI yield for Jekyll Island Club Resort, which we acquired in late July. And 5.5% for Estancia La Jolla, which we acquired on December 1st. We expect all of these returns to be higher by the end of 2022. And while these improved results do include some of the benefits from the many operating changes we've already implemented with our operators, these returns are all before the ROI from the physical improvements we're planning that will reposition these properties higher. Since 2018, we've invested $350 million in transformational redevelopments and major renovations in 25 properties including 16 properties acquired through the LaSalle transaction in late 2018. Remember, these dollars have already been invested, and the improvements are now in place. But in most cases, we're just beginning to see the returns on these sustainable investments. We're increasingly excited about the improved performance of these properties as demand returns And their increased performance will substantially increase our growth rate over the next few years. And we have more transformations on the way. Just last month, we completed the $6 million redevelopment of the 108 room grafted on sunset in West LA, which we transformed into Hotel Ziggy, the eighth member of our unofficial Z collection. Ziggy seeks to recall the heyday of music on the Sunset Strip through its design and by adding a new music venue called BackBeat as the heart of the music immersion experience throughout the entire property. We recently held our grand opening, and the reviews have been off the charts, so to speak. In June, we plan to reopen Hotel Vitali in the financial district of San Francisco following a $28 million transformation into the eco-focused luxury One Hotel San Francisco. The construction is complete, and we're just waiting for the final FF&E deliveries before we can reopen. This completely redeveloped property is spectacular, and with its Bay Bridge and skyline views, in-house Bamford Wellness Spa, and its new farm-to-table offerings, it should dominate in the luxury category of hotels in San Francisco. Our upcoming major projects include the $22 million total redevelopment of Hotel Solimar in San Diego's Gaslamp District into Margaritaville-San Diego Gaslamp District. We've completed the property's design and plan to start construction towards the end of the third quarter. Given the performance of Margaritaville Hollywood, we're very excited about the large upside from this transformation. We're big believers in San Diego. Not only is San Diego the most popular convention destination in the U.S., but its premier weather attracts a robust level of leisure travel, and there's a new large life sciences segment that's in the process of sprouting downtown. In October, we also intend to commence the $20 million comprehensive renovation of Hilton Gaslamp just two blocks from Solimar and probably the best located hotel in all of San Diego, but certainly in the Gaslamp District. This hotel is at the entrance to the Gaslamp District directly across from the center of the Convention Center. The focus of our redevelopment is to further evolve this property as a lifestyle Hilton and take advantage of its prime location, outdoor areas, great views, and unique architecture. We're re-merchandising the entire ground floor, opening the property to the outdoors, creating a large indoor-outdoor bar, and more fully re-merchandising a second floor indoor-outdoor event venue. The rooms will mirror a more typical contemporary Southern California seaside bungalow. We expect our transformed Hilton and Margaritaville will lead the market in rate and rev par as they stabilize over the next few years. Both of these properties will remain open during their redevelopments, and both are expected to be complete by the end of the first quarter of next year. We're also in the middle of planning extensive redevelopments and re-merchandising of our recently acquired Jekyll Island Club Resort in Estancia, La Jolla. We haven't yet finalized the scope of these major projects, but we do expect them to be completed in phases, with some of the scope likely getting done later this year and through Q1 of next year, including complete room renovations at both properties. We're also planning to complete the second and final phase of the reinvigoration of the iconic Viceroy Santa Monica come this winter. Our rooms renovation should start in November that will complement the transformation of the property's entire indoor and outdoor ground floor that we completed in 2022. We expect to gain additional rate and rev par share following the completion of this final phase in Q1 next year. 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 just completed here in the second quarter to Chaminade Resort in the Santa Cruz Mountains that continues the transformation of this former conference center into a more amenity-rich, luxurious leisure and group destination. We're also adding a new leased restaurant at Mondrian in West Hollywood, which will complete the property's recent $19.5 million redevelopment to return it to its former glory on Sunset Boulevard. And we're adding five keys at La Meridian Delfina Santa Monica, which we're creating out of unused storage rooms and offices. And then there are two major multi-year projects we've been hard at work on for a couple of 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 treehouses 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 many as a couple hundred units of alternative lodging at each property. These developments will likely include treehouses, glamping, spaces for luxury RVs, cabins, villas, farmhouses, and additional outdoor venues and amenities. Later 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 like the planets and stars are beginning to align for Pebble Brook and our industry. So now we'd love to move to the Q&A portion of our call. Donna, you may now proceed.