Pebblebrook Hotel

Greetings and welcome to the Pebble Brook Hotel Trust third quarter earnings 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, Mr. Raymond Martz, Chief Financial Officer. Thank you, sir. Please go ahead.

Thank you, Donna, and good morning, everyone. Welcome to our third quarter 2022 earnings call and webcast. Joining me today is John 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. These statements are subject to numerous risks and uncertainties, as described in our SEC filings. Future results could differ materially from those implied by our comments. Forward-looking statements that we make today are effective only today, October 28, 2022, and we undertake no duty to update them later. We'll discuss non-GAAP financial measures during today's call, and we provide reconciliations of these non-GAAP financial measures on our website at pebblebrookhotels.com. So last night, we reported stronger than expected Q3 results led by our urban hotels. Business travel, both transient and group, continued its recovery throughout our markets, clearly benefiting our urban properties the most. And leisure travel has returned to the cities as well, Bookings improved after Labor Day as business travelers got on the road to meet with their customers, reconnect with their coworkers, and participate in major conventions and meetings. Leisure travel in the quarter remained robust, along with very strong rate premiums over 2019. We saw a solid and consistent improvement in our operating metrics throughout the quarter. Overall, we experienced encouraging trends across our portfolio throughout the quarter, which continued in October. we have not seen any signs of a slowdown in travel demand. However, given the Fed's actions, we continue to closely monitor bookings, cancellations, activity levels, corporate travel policies, and overall spending for any signs of a slowdown. Q3 total revenues exceeded our outlook despite the negative impact of Hurricane Ian, which made landfall near Naples on September 28th. Given the Hurricane Ian's large size, changing track and forecast and its impact on Florida and the Georgia coast. It had some effect on all of our southeast properties. Overall, it reduced our hotel revenues by approximately $2 million in September. Of course, the most significant impact was in Naples, with roughly half of the September revenue loss occurring at La Playa. Despite the impact of Hurricane Ian on our results, adjusted EBITDA was above the top end of our Q3 outlook by $1.5 million. And adjusted funds from operations, of 66 cents per share was one cent above the top end of our outlook. On the revenue side, same property rep par exceeded Q3 19 by 1.3%. Q3 was the first quarter since the pandemic that we surpassed the 2019 comparable quarters results. Both July and September, same property rep par, total revenues and hotel EBITDA exceeded the comparable months in 2019. July benefited from solid leisure demand In September, it benefited from strong business demand, which was very encouraging. ADR was 20% above Q319, led by our resorts, which were up 57% to Q319, and our urban ADR was up 8.3%. Both of these represent an increase from their Q2 premiums of 54.4% for our resorts and 6.8% for our urban hotels. Non-room revenue per occupied room rose an even stronger 23.3% versus 2019, and total revenue per occupied room increased by 21%, maintaining the positive trends we've experienced all year. These revenue increases demonstrate our sustainability to take room and non-room price increases across the portfolio and our customers' willingness to accept them, thereby helping to offset operating cost increases. Q3 occupancy finished at 72.7%, which is still only 85% recovered to 2019, indicating a substantial opportunity to grow revenues further as demand continues to recover and normalize. Our resorts achieved an occupancy of 69.3%, and despite all the discussion about strong leisure, occupancy at our resorts is still only about 88% recovered to 2019. Urban occupancy, which exceeded our resort occupancy for the first time since the pandemic, finished at 73.3%, yet it is still only 83% recovered to 2019, leaving a lot of upside yet to recover. Same property hotel EBITDA of $130.9 million is 96.8% recovered to Q3 2019, which marks our best quarter compared to 2019 since the pandemic, and it would have been closer to just 2% off from 2019, but for the impact of Hurricane Ian. Our hotel EBITDA margin was 32.4%, versus 34.3% in 2019, so up just 192 basis points, with occupancy down about 13 occupancy points to Q3 2019, so very encouraging. And when you consider that the CPI has increased over 15% since 2019, this means that in today's dollars, if our expense growth in 2019 would have followed the increase in the CPI index, we would have had $300 million of operating expenses in the quarter, versus the $273 million we actually incurred, so about $27 million less in operating expenses. This underscores our success in mitigating operating cost increases in this inflationary environment through price increases and also evidences the more efficient operating models created at our properties as a result of the pandemic. As the recovery continues in the hotel industry, we expect to generate higher profit margins. Shifting to our capital improvement program, we remain on track to invest $100 million to $110 million into the portfolio in 2022, with over $80 million of it targeted for a number of 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. Relating to La Playa, we want to provide you with an update on the restoration and reopening of the resort following Hurricane Ian. The playa, which sits directly on the Gulf of Mexico Beach, was unfortunately impacted by an eight to nine foot storm surge that caused the most damage to the property. Fortunately, the Gulf Tower lobby and the restaurant start one floor up from the beach, as does the Bay Tower on the other side of the property. As a result, the most significant damage was done to the beach house building, impacting rooms and building equipment on the beach level, as well as the landscaping and hardscaping throughout the property. The buildings also suffered some water infiltration from the heavy rains and wind, though it is relatively minor compared to the ground floor impact. Fortunately, we were well prepared and had a large third-party remediation crew positioned nearby who arrived with remediation equipment and a crew of 200 to start the inspections, cleanup, remediation, and repairs the day after the hurricane hit. And while the Naples Beach area continues to be without power, our remediation partner brought in large generators to power all the buildings, dry them out, and get their air handling systems working quickly. While the Playa remains closed as we conduct repair and remediation work, we have already begun to make significant progress in the cleanup, repair, and rebuilding, even without electricity being restored to the area. We are striving to reopen parts of the resort by late November, but much of the public area is repaired and renovated. We expect to have most of the guest rooms in the Bay Tower completed and available that time, with guest rooms in the Gulf Tower scheduled to reopen then or perhaps later in the fourth quarter. The Beach House, which as its name suggests, is right on the beach, will take more time to repair as this building received the brunt of the damage from the hurricane. Our best estimate at this time is that the Beach House building reopened sometime in the second half of next year, but we're not really comfortable with any forecasts at this point. The biggest obstacle to reopening is the long lead time for electrical and elevator equipment, The rest of the building repairs will be completed much earlier. Based on our review of the resort with our property adjusters and physical property experts, we currently estimate that the cost to remediate, repair, replace, and clean up La Playa will be between $15 and $25 million. This estimate could increase as we progress through the remediation and repair program. At La Playa, we expect that our business interruption insurance will cover all the losses after the estimated $1.7 million deductible for B.I., Beyond La Playa, at southernmost beach resort Key West, which remained open throughout the hurricane, we incurred wind and water-related damages to the resort, including a tanning pier that was destroyed. We estimate that the property damage should be between $7 and $9 million. At the Inn on Fifth in downtown Naples, we expect to incur $1.5 to $2.5 million of remediation and repair work, and we're already pretty far along to completion. As a result of the impact of Hurricane Ian El Playa and Southernmost, we accrued a reduction in property assets of approximately $12.9 million. However, we believe we'll recover this right down through our property insurance program, except for the $7.9 million combined property and casualty deductibles at these two resorts. We've reflected this amount in our impairment and other loss items on our income statement. When we received the business interruption proceeds from our insurance carriers, we will reflect this in our financial statements. We do not expect this to occur until sometime in 2023. Shifting now to the investment side of our business, we sold three hotels in a quarter, one in San Francisco, one in Portland, and one in Philadelphia, generating $183.9 million of sales proceeds. And year-to-date, we have sold four hotels, generating $260.9 million. Turning to our balance sheet, we successfully completed a $2 billion refinancing of all of our credit facilities and term loans. This has allowed us to extend our debt maturities and increase the size of our unsecured revolver to $650 million, all while maintaining the same price on this debt as we had pre-pandemic. As a result of the successful refinancing, we have no meaningful debt maturities until October 2024. We also have limited exposure to rising interest rates as 79% or $1.9 billion of our debt in convertible notes have fixed interest rates. leaving about $500 million of floating rate debt. As a result, our weighted average interest cost is below 3.2 percent. This floating rate debt allows us to pay down debt whenever we like without prepayment penalties. For the proceeds of our recent property sales, positive operating cash flow, and debt refinancing, we currently have approximately $120 million of cash. Our $650 million credit facility is completely undrawn, providing us with tremendous liquidity and flexibility. We also paid down approximately 127 million of debt since the end of the second quarter. And on that positive note, I'd like to turn the call over to John. John?

Thanks, Ray. As Ray indicated, despite the impact of Hurricane Ian, the quarter came in slightly above the top end of our outlook, with the hotel operating performance at the high end of our outlook. The outperformance was driven by the continuing strong recovery in our urban markets, with transient group and citywide demand improving and leisure customers returning to the cities. This urban recovery in our portfolio was widespread and it involved all properties and markets. Every one of our urban markets, except Miami, achieved better REVPAR performance in the third quarter compared to 2019 versus the second quarter compared to 2019. In the third quarter, our urban rev par was down 10.1% versus Q3 2019, and that compares to Q2's 17.7% shortfall. Clearly, that's a significant improvement. Not surprisingly, the markets with the most extensive gains from the second quarter were most of the previously slower-to-recover markets, including Chicago, Seattle, Washington, D.C., and San Francisco, but San Diego also moved ahead strongly with a very active and successful citywide convention calendar in the third quarter. And San Francisco, as indicated, was one of the most robust recovering markets in the third quarter. Many of you joined us in San Francisco last month when we spent two days touring six of our hotels and several of Park's hotels. We happened to be there during Dreamforce, which filled the city's hotels with high-rated customers and was a very successful citywide for the city. The city looked great. It was clean with lots of people on the streets. The restaurants were overflowing. And the negative elements that have gotten so much publicity were frankly not very noticeable. The city continues to make progress in addressing its problems. The successful Dreamforce convention not only helped September's overall performance, but was clear evidence that a recovering convention calendar will have a very favorable impact on our industry's recovery in San Francisco as we move into next year, which has a much improved convention calendar compared to this year. I'd also like to highlight the performance of one of our recently redeveloped and transformed properties in San Francisco, Because due to a great team effort, its strong performance highlights the power and the success of our redevelopment capabilities, our efforts, and extensive program following the LaSalle acquisition. And it does so even in one of the slowest recovery markets in the U.S. I'm talking about the $28 million redevelopment and transformation of Hotel Vitali, into the eco-focused Luxury One Hotel San Francisco. This extremely well-located property across from the Ferry Building along the Embarcadero reopened as The One on June 1st. This property represents our values and our focus and commitment to sustainability, repurposing, and reuse, and it appeals to a large base of customers with similar values. The hotel has been extremely well received by the community and customers, and in just a few months has risen to the number four TripAdvisor traveler-ranked hotel in San Francisco, just one spot ahead of our Harbor Court Hotel a block away. Since its reopening as a one, we've been averaging rates in the $480 to $580 range on a monthly basis. And these rates are between $130 and $165 higher than the comparable months in 2019. In September, room revenues exceeded September 2019 by over 10%, even with occupancy lower by almost 12 points. We achieved total revenues that exceeded 2019 by over 18%, And EBITDA was more than 50% higher than in September 2019. Now, I'm not saying we're going to do this next month or every month going forward. But we do believe the rate premium we ultimately achieve on a stabilized basis will be similar or higher than what we've already been achieving. And as the market continues to recover and we ramp up, we should be able to drive at a minimum of 15% plus cash yield at stabilization on our $28 million investment that created this fantastic conversion. Similar transformational investments we've made recently in so many of our properties obtained through the LaSalle acquisition should also deliver 10% plus cash yields on our investments. These include the previous transformations of the Hilton San Diego Resort into Mission Bay Resort San Diego, the Hotel Donovan into Hotel Zena, Mason and Rook into Viceroy Washington D.C., Grafton on Sunset into the funky Hotel Ziggy on the Sunset Strip, the dramatic upgrading of Chaminade Resort in Santa Cruz, Skamania Lodge in the Columbia River Gorge, Le Parc in West Hollywood, Viceroy Santa Monica, Lobert's Del Mar, and Southernmost Resort in Key West, as well as the upcoming transformations of Hotel Solomar into Hotel Margaritaville Gaslamp Quarter in San Diego, Paradise Point in Mission Bay, San Diego, into a Margaritaville Island Resort, and dramatic transformations and upgrading of our recent acquisitions, the Jekyll Island Club Resort in the Golden Isles of Georgia, Estancia La Jolla in San Diego, and Gurney's in Newport, which has also been renamed Newport Harbor Island Resort. ADR and RevPar share gains as these properties grow to stabilization, will add to our growth in the years ahead, regardless of the macro environment. And I'd be remiss if I didn't mention the dramatic upgrading of La Playa in Naples into a luxury resort that we completed before and unfortunately again after Hurricane Irma. La Playa Beach Resort and Club which of course is currently closed due to Hurricane Ian, was on track to deliver over $35 million of EBITDA this year. This would have been a doubling of EBITDA from 2019 when we completed the upgrades post-IRMA. The full year forecast is consistent with the year-to-date improvement through September and is a result of several positive factors, including the huge upgrades we previously made to the property a unique and very successful beach membership club that is contained in the property where we've upgraded the experience, a great collaboration between our team and Noble House, who has done a fantastic job on the ground driving this performance, and the ongoing benefits of the pandemic that have led to increased pricing at many high-end resorts. I raised La Playa not only as an example of a very successful transformation we previously completed that has delivered a very high return on our investment, but because it will be built back better after Hurricane Ian's unfortunate damage. As we look forward to the fourth quarter, which of course is well underway, the improving business travel trends we experienced in Q3 are continuing. Corporate group bookings, leads, and site visits remain very healthy, and at most properties, they're exceeding 2019 levels. We're closely monitoring overall business and leisure consumer behavior and have not seen any pullback in demand, future booking pace, or room rates other than the normal seasonal slowdown later in the quarter. Nor have we seen any increase in cancellations, or any meaningful changes in corporate travel policies. But of course, we will be monitoring these closely, as we are now, as the macro economy slows down. We believe that we have strong tailwinds from the continuing recovery of business, leisure, and inbound international travel to more normalized levels consistent with the current levels of GDP, which of course, are significantly higher than 2019 levels. We believe these strong counter-cyclical tailwinds, along with already low and falling levels of supply growth, will help blunt pressures from the inevitable economic slowdown that the Fed intends to deliver. Based on our recent trends, our current outlook for Q4 RevPar is to be down 3% to flat to 2019 and up 32% to 36% to Q4 2021. The closing of La Playa, which represents a disproportionate amount of our room revenues and EBITDA, has a roughly 150 basis point negative impact in the fourth quarter to our room revenue and total revenue percentage comparisons to 2019. And it has an approximate 750 basis point negative impact to our EBITDA comparison to Q4 2019. So our same property outlook for Q4 assumes La Playa is essentially closed for the entire fourth quarter. While we're currently targeting a partial reopening in the quarter, We still expect additional expenses related to operations and cleanup will exceed any revenues achieved in the quarter by $2.5 million, though this is obviously a pretty rough guess at this point, as we still haven't even had electricity restored to the Vanderbilt Beach area. So we've removed approximately $17.1 million in hotel revenues and $10.5 million in hotel EBITDA or $0.08 per share of FFO from our Q4 outlook. So it is impactful to the quarter. However, we expect to recover this lost EBITDA less RBI deductible from our insurance claim next year. Adjusted EBITDA for Q4 is expected to be down 30% to 38% to Q4 2019 and up 45% to 63% to Q4 2021. Excluding the impact of La Playa due to the hurricane, our Q4 outlook would assume same property rev par of down 1.6% to up 1.3% to Q4 2019 with adjusted EBITDA of 74.3% million to $82.3 million, which is roughly in line with 2019, if you add back La Playa's impact. This outlook is generally in line with our previous expectations, is consistent with our Q3 performance, excluding La Playa, and indicates that our expectations for Q4 performance haven't changed, despite heightened concerns about an economic slowdown. So that completes our prepared remarks. We'd now like to move on to the Q&A portion of our call. Donna, you may now proceed with the Q&A.