Pebblebrook Hotel

Greetings and welcome to the Pebble Brook Hotel Trust Second 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, 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 Martz, Chief Financial Officer. Thank you. Please go ahead.

Thank you, Donna, and good morning, everyone. Welcome to our second quarter 2022 earnings call and webcast. Joining me today are John Bortz, our Chairman and Chief Executive Officer, and Tom Fisher, our Chief Investment 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 and uncertainties, as described in our SEC filings, and future results could differ materially from those implied by our comments today. Forward-looking statements that we make today are effective for today, July 27, 2022, and we undertake no duty to update them later. We'll discuss our non-GAAP financial measures on today's call, and we provide reconciliations of these non-GAAP financial measures on our website at pebblebrookhotels.com. Last night, we reported very favorable Q2 results, faster growth than we expected in business travel, both group and transient, coupled with continuing robust leisure demand allowed us to significantly exceed our expectations from 90 days ago. Our urban properties led the upside. Second quarter adjusted funds from operations at 72 cents per share with 9 cents above the top end of our outlook and 83% of Q2 2019's AFFO. This represents a dramatic improvement to both last year when we had negative AFFO of 10 cents per share and Q1, which was just 23% of Q1 2019. This strong performance was driven by the hard and intelligent work of our hotel operating teams, management companies, and asset managers. We thank each of them for their great effort and achievements in the quarter. On the revenue side, the same property rep art came within 5% of Q2 2019, even though occupancy was down 20%, showing the sizable demand recovery opportunity we still have ahead. Average daily rate climbed a very strong 18.7 percent compared to Q2 2019. Non-room revenue per occupied room rose an even stronger 25.1 percent, and total revenue per occupied room increased by 20.8 percent, all representing an acceleration from Q1's growth rates. These revenue increases demonstrate our sustainability to take room and non-room price increases across the portfolio, which are offsetting operating cost increases. Same property revenues recovered to 96.9% of 2019 levels, despite occupancy at 69.4% versus 86.7% in Q2 2019. Same property hotel EBITDA recovered to 94.7% of Q2 2019, which marks our best quarter compared to 2019 since the pandemic. Even more encouraging were the rapidly improving demand trends as the quarter progressed throughout our urban markets from both the business and leisure demand segments. In Q1, our urban hotels ran an occupancy of 45%. In April and May, we experienced a rapid improvement in demand in both business and leisure demand from both group and transient, driving occupancies up to 65% for both months, with another significant step up in occupancy in June to 72%. For July, we're forecasting occupancy at 7% or more for urban hotels, down slightly to June, as business travel has historically been slower during the heavy summer vacation season in July and August. And it does appear that historical seasonal demand patterns, including weekday versus weekend demand, are returning as business travel recovers. For example, we are now experiencing slightly softer occupancy levels especially from business travel around and during the weeks of major three-day holidays like Memorial Day and July 4th. This is a reversal from last year when the three-day holidays were the more substantial periods of hotel demand given the lackluster level of weekday business travel last year. Driving into the occupancy improvement from Q1 to Q2, Boston improved from 68% in Q1 to 87% in Q2. San Diego from 61% to 78%, Philadelphia from 46% to 72%, Chicago from 28% to 66%, Seattle from 31% to 64%, DC from 27% to 63%, and San Francisco from 24% to 50%. Weekday occupancy at urban hotels, which is a good proxy for business demand, increased to 66.9% in Q2, representing a dramatic improvement from Q1's 43.4%, yet still down about 20 percentage points to 2019, which represents a significant opportunity for further recovery as we head into the prime business travel season in the fall. Weekend occupancy at our urban hotels rose to 73.3% in Q2, compared with 54.4% in Q1. Again, a very encouraging sequential improvement quarter to quarter and representative of the domestic and international leisure customers beginning to return to the major cities. At our resorts, we continue to experience robust demand with occupancy at 71% for Q2 compared with 78% in Q2 2019, so down just 7 percentage points due to normal seasonality. This is a significant sequential improvement from Q1 when we were down 13 percentage points. Our same property room rates at our urban hotels increased rapidly during the second quarter, growing 22.2% from $234 in Q1 to $286 in Q2. ADR for urban markets in total exceeded Q2 2019 by $19, or 7.2%. And many of our urban markets ADR exceeded Q2 2019, including Miami, LA, Boston, San Diego, DC, and San Francisco, which is a market that probably surprises some of our investors. Weekday ADR at our open hotels is $279, slightly exceeding Q2 2019 and the first quarter that urban weekday ADR exceeded a comparable quarter in 2019. Weekend ADR was $281, surpassing 2019 by over $40 or 17.4%. This overall increase in demand and pricing continues to be extremely encouraging especially since our urban markets still have a lot of demand yet to recover, which we expect will continue throughout the year. At our resorts, despite more difficult year-over-year comparisons in several resort markets, such as South Florida, Q2 ADR was $427, which was up 54% to Q2 2019 and a substantial 16% over Q2 last year. These powerful pricing trends are continuing into July, which historically is one of the strongest leisure demand months of the year. Same property hotel EBITDA for Q2 was $138.8 million, down just 5.3% to Q2 2019, despite occupancy about 20 points below 2019. Resulting, same property hotel EBITDA margins for Q2 were down just 83 basis points compared with Q2 2019, mainly due to increased fixed expenses, including property taxes and insurance, which increased 12%, negatively impacted margins by about 100 basis points. Excluding these fixed expenses, hotel EBITDA margins actually increased by 20 basis points compared with the second quarter of 2019. We're pleased with these results given occupancy is still only 80% recovered to 2019 levels. The ability to expand our same property EBITDA profit margins as occupancy recovers highlights the significant upside going forward as more business travel returns with favorable operating leverage yet to be realized in the portfolio. This also underscores the revised business models at our hotels. Our properties are more operationally and technologically efficient, mitigating operating cost increases in this inflationary environment. As a result of these much better than forecasted hotel operating results, our adjusted EBITDA climbed to 128.8 million, 83.8% recovered versus Q2 2019, and 10.3 million above the top end of our Q2 outlook. As we look forward to the third quarter, the improving business travel demand trends are continuing. There seems to be plenty of pent-up demand for meetings. Corporate group bookings, leads, and site visits remain healthy. We're closely monitoring overall business and leisure consumer behavior and have yet to see any pullback in demand, future booking pace, or room rates, so very encouraging. We continue to expect ADR to be far higher than 2019, team 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 Q3 versus 2019 is for rep part to be down just 5% to 8% and up 32.5% to 36.8% to Q3 2021. Given economic indicators that are showing signs of slowing, And while we haven't seen any indication of a slowdown in the travel recovery, we're being suitably responsible for our Q3 outlook. Adjusted EBITDA is expected to be down just 12% to 19% to Q3 2019, and up 93% to 110% to Q3 2021. This outlook is better than we expected 90 days ago, revealing an improving hotel demand and overall travel environment, despite heightened concerns about the economic slowdown. Our Q3 outlook for REF PAR same property hotel EBITDA, adjusted EBITDA, and adjusted FFO, remove the three properties we currently have under contract as we assume these hotels are sold during the quarter. Shifting to our capital improvement program, we remain on track to invest $100 million to $120 million in the portfolio in 2022 with approximately $80 million of it targeted for a number of ROI redevelopment projects, which we expect would generate cash and cash returns of 10% or higher when these transform and re-merchandise hotels and resorts stabilize over the next two to three years. John will provide additional color into some of these projects later on our call. On the investment side, on May 11th, we acquired the luxurious In-N-Fifth in downtown Naples, Florida for $156 million. And on June 23rd, we acquired Gurney's Newport Resort and Marina for $174 million. Both of these resorts have healthy trailing 12-month NLI yields, with the In-N-Fifth at 7%, and Gurney's Newport at 7.1%. Looking at our 2021 acquisitions, they are all exceeding our underwriting, and more importantly, they are already generating robust trailing 12-month NOI yields. Margaritaville Hotel Beach Resort has hit 9.8%, Jekyll Island is at 8.5%, Estancia at 7.4%, and the Key West B&B is at 10% plus. We also made significant progress with our disposition plan. On June 28th, we completed the sale of the marker San Francisco for $77 million. We have also executed three separate purchase and sale agreements, which include hard money deposits with separate buyers for three of our urban hotels, totaling $183.9 million of additional gross sales proceeds. We expect these sales to be completed during the third quarter, and we have additional properties on the market for sale. While the transaction market has gotten bumpier due to debt markets and some deals are taking longer to close, quality assets like ours continue to be desired by the vast amount of equity looking to invest in the hotel industry. Turning to our balance sheet, we have no meaningful debt maturities until November 2023, and as of June 30th, we had approximately $560 million of liquidity, and 75% 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 and proven demand trends, we have exited our covenant waiver period with our bank group. This marks another significant milestone in our road to recovery and substantially enhances our balance sheet and operating flexibility. And on that positive 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 second quarter and heading into the third quarter. For Pebble Brook, we're almost back to 2019 levels for both revenues and hotel EBITDA. This recovery and the prior recoveries following the great financial recession, the 2001 recession and the events of 9-11, the great real estate collapse of the early 90s, and the Fed-induced recession in the early 80s have clearly demonstrated the incredible resilience of the hotel industry. After each recession, recoveries have led to record highs in hotel revenues and profits. This industry, while obviously much more volatile, than other real estate sectors, always bounces back, sets new records relatively quickly, and due to its one-day leases and secular demand growth, has forever followed inflation and replacement costs higher. We see no reason for any different outcome this time, and this year's recovery firmly demonstrates our industry's incredible resilience. With replacement costs for our portfolio currently estimated in the $750,000 per key range, and with supply growth severely restricted by the pandemic, very limited availability of construction financing, and generally challenging economics for new builds, our industry and company have a very long runway to not only fully recover, but to again grow and hit new revenue and bottom line records. We expect the supply constrained environment to last four or five years. And whether we soon have an economic slowdown or recession, it's just a matter of time before we hit these new records given these supply-restricted fundamentals. In addition, our performance is and will be further bolstered by the benefits coming from the significant investments we've made in our portfolio in the last several years, where we redeveloped, transformed, and repositioned properties, mostly from the LaSalle portfolio, to higher quality levels with higher average rates and ultimately higher bottom lines. This is already being demonstrated by our overall ADR share growth in the portfolio, particularly at our resorts, where recovered demand levels have allowed us to price our repositioned properties substantially higher. For example, year to date, Our resorts have gained on average over 1,700 basis points of ADR share over their market competitors, representing $57 more in rate, or roughly one-third of the massive $171 ADR gain at our resort since 2019. Gaining this extremely large amount of rate is obviously a big part of the reason for the large bottom line growth at our resorts over 2019 levels. And it has already resulted in a very significant return, our investments in repositioning and transforming these resorts over the last few years. Year to date, our resorts, excluding Gurney's and in on Fifth, have gained $30 million more in EBITDA than the first half of 2019. and they're on pace to gain between $50 and $60 million for the entire year. Our investments to redevelop, reposition, and upgrade these properties, along with adding amenities and transforming and reconcepting restaurants and bars, re-merchandising indoor and outdoor space, total approximately $120 million. So our return on these investments has already been very attractive, and there's more to come as these resorts have not yet stabilized. At La Playa, for example, where we invested $20 million to dramatically upgrade this property to its current luxury positioning, our EBITDA has grown from $16.5 million for full year 2018 to $33.5 million on a trailing 12-month basis through June 2022. The improvement in bottom line results at La Playa, like our other properties, comes not only from gaining significant rate share. In the case of La Playa, it's over 2,800 basis points versus 2019, or $129 of ADR. But the EBITDA increase also comes as a result of the improvements we made throughout the resort. This includes the restaurants, including Balin, which is the main restaurant and bar, which now does over $17 million in revenues on an annual basis, and the Tiki Bar, and the retail outlet and spa, and the club restaurant, and improvements to the meeting spaces and other venues. Non-room revenues at La Playa have grown from $24.7 million for full year 2018 to $36.7 million on a trailing 12-month basis through June 2022. Clearly, this almost 50% increase in non-room revenues is contributing substantially to the almost doubling of EBITDA of this property since 2018, even though we only just completed the full redevelopment last summer. Or consider Mission Bay Resort, where in the second quarter of 2020, we completed the repositioning of this former Hilton to a luxury independent resort through a two-phase $32 million redevelopment. As this property is just beginning to kick into gear this year, we've gained 680 basis points of rate share versus 2019, and we're building momentum as group returns in a big way. And with the dramatic improvements in the public areas and additional outlets, to drive increased non-room revenues. San Diego Mission Bay Resort grew non-room revenues by 49% in the second quarter from the same quarter of 2019. The rate improvement combined with the huge growth in non-room revenues led to a 124% increase in EBITDA in the second quarter versus 2019. At Lobert's Del Mar, where we recently completed a dramatic $11.7 million repositioning of this small luxury resort in the second quarter of 2021, we've gained over 3,100 basis points of ADR share versus our luxury competitors, or $115 so far this year as compared to first half 2019. Combined with our substantial improvements to our public areas, and the addition and reconcepting of all restaurant and bar outlets, which have also substantially increased our non-room revenues, EBITDA and Q2 grew by 76% compared to the second quarter of 2019. Take Chaminade, where we just completed a $3 million resort pool, which we added to our existing pool and follows 2020's dramatic repositioning of the resort's public areas meeting space, restaurant and bar, outdoor event spaces, and wedding venues into a luxury product. Chaminade has already gained 920 basis points of rate share year to date, and food and beverage revenues have grown 49% so far this year, all together delivering growth of 107% in EBITDA versus the first half of 2019. As this property begins to ramp up from its repositioning over the next few years, it is a huge opportunity for growth. Every one of our resorts, with the exception of Inon Fifth and Gurney's Newport, which we just acquired, all of them have gained significant rate share so far in 2022, and all have done so as a result of the significant investments we've made, transforming and upgrading them. Even Jekyll Island Club Resort, where we haven't yet started our redevelopment, has gained significant share due to a repositioning opportunity we and Noble House recognized when we were acquiring this very unique property. And there's a lot more upside to come as we commence our redevelopment this winter. Yet the property investments we've made to drive upside in our bottom line haven't been limited to our resorts. In 2020, We completely renovated both the Embassy Suites and Westin Gas Lamp in downtown San Diego through $34 million in total upgrades between the two properties. And we're just beginning to see significant benefits at both of these properties as city-wides and group meetings return in a meaningful way. We expect to gain 700 to 1,000 basis points of rate share upon stabilization. In the second quarter of 2020, We also completed the $12.5 million transformation and upgrading of Le Parc Suites in West Hollywood, one of our three all suite West Hollywood hotels. Year to date, rate is up 23%, or $57 versus 2019, at $307 for the first six months, and we're gaining ground on our competitors. For the first quarter, since the redevelopment was completed, that being the second quarter, Le Parc's Q2 EBITDA exceeded Q2 2019, in this case, by 10%. Also in West Hollywood, in late March, we completed a $6 million transformation of the 108-room Grafton on Sunset to Hotel Ziggy, the newest member of our unofficial Z Collection. While we're really just getting going, the reviews and customer response at this unique Music-focused hotel and venue have been off the charts, so to speak. In our first quarter since the completion and conversion, our ADR has already climbed $45, or 22%, compared to 2019. In the second quarter of 2020, we also completed $43.5 million worth of major redevelopments at Viceroy Santa Monica, and what are now Hotel Zena DC and Viceroy DC. These three hotels are still in the early stage of their ramp up, but the new products have been very well received and all have significant upside as demand returns to these markets and we have an opportunity to push rates and gain share. Santa Monica's faster market recovery is allowing us to achieve significant improvement at the Viceroy Santa Monica as its rate is up 22% or $82 in the first half of this year as compared to 2019. And most recently, we completed the $28 million redevelopment, transformation, and conversion of Hotel Vitali into the luxury and eco-focused One Hotel San Francisco. We reopened the hotel on June 1st. The hotel is ramping quite rapidly with occupancy growing from 28% in June to the low to mid 40s here in July, with further increases expected through August, September, and the rest of the year. Most impressive and encouraging has been the rate growth we're already achieving. So far, average rates are over $100 higher than in 2019, as we're now competing head-to-head with the luxury set in San Francisco. As demand continues to recover, we feel confident that this hotel will achieve an outstanding return on our $28 million investment. In addition to the future upside from the 20-plus properties we've transformed and repositioned higher in the last several years as these properties ramp up to stabilization, We have significant additional upside from the major upcoming redevelopments of some of our recent acquisitions, including Jekyll Island Club Resort in Georgia, Estancia La Jolla Hotel and Spa, Margaritaville Hollywood Resort, and Gurney's Newport Marina and Spa in Newport, Rhode Island, as well as properties obtained, all of these properties, sorry, were obtained through the LaSalle acquisition. including the upcoming conversion, I'm sorry, these are additional to those properties from the LaSalle acquisition, and they include the upcoming conversion of Hotel Solomar to Margaritaville Gaslamp District, the second and final phase of the Viceroy Santa Monica redevelopment, the lifestyle transformation of arguably the best low-decade hotel in downtown San Diego, Hilton Gaslamp District Hotel, the conversion of Paradise Point Resort in Mission Bay, San Diego, to a Margaritaville resort once our plans are approved, and the future addition of potentially hundreds of alternative lodging units and other facilities and amenities at both Skamania and Chaminade. In addition to the very significant upside from these major past, current, and future redevelopments and repositionings, as the recovery continues and we move to the growth phase of the economic cycle, whether next year or the year after, there is very significant operating leverage in our portfolio from the more efficient property level operating models developed by our operating teams during the pandemic. We've also spent the last almost four years transforming our portfolio to a more balanced leisure and business customer mix, achieving a 50-50 balance through the past and upcoming sales in our urban markets, and the acquisition of a number of more leisure-focused resorts. Our portfolio transformation has been ongoing since we acquired LaSalle and sold roughly $1.6 billion of urban hotels from that portfolio. And finally, the acquisitions we've made this year are being financed by sales, including the recent sale of a marker San Francisco for $77 million The three properties currently under separate contracts to be sold for $183.9 million, which we announced yesterday, and additional properties that are on the market. And we also funded half of the in on fifth acquisition with $77 million of preferred units. We also expect to bring additional properties to market for sale later this year. At this point in time, we expect to be a net seller for the year. We're very optimistic about the future of our business. We've been very busy, hard at work creating value, which we believe we're doing successfully. And we're confident the investment community and the market will recognize the very large disconnect between the current public market value of our company which seems to have already more than discounted moving into the potential danger zone of a recession, and the underlying private market values of our company based upon property values determined by real current transactions. Now, we'd love to move to the question and answer portion of our call. So Donna, you may proceed.