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spk05: 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.
spk09: 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?
spk10: 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.
spk05: Thank you. The floor is now open for questions. If you would like to ask a question, please press star 1 on your telephone keypad at this time. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. In order to give everyone the opportunity to ask questions, we do ask that you please limit yourself to one question and only one follow-up. Once again, that is star one to register a question at this time. The first question is coming from Dori Keston of Wells Fargo. Please go ahead.
spk02: Thanks. Good morning. How long do you think it may take for your Naples properties to return to stabilized operations when you consider the recovery of the entire market also?
spk10: I don't think we have an estimate on that yet, unfortunately, Dory. It'll be extremely hard to forecast. We had a pretty quick recovery from Irma back in 17. 18 was a very good year. 19 was obviously even better. for that market and that property. You know, it's interesting, if you go three blocks inland, there are not a whole lot of visible signs of an impact from Irma. And if you go downtown, which obviously is a very popular destination, where In-On-Fifth is, the downtown looks like it did before, pretty much. I do think the recovery will be pretty quick. The city's already been cleaning up the beach. Their objective is to open the beach as quickly as possible. And of course, you can't beat the weather. The last thing I would say about Naples, which is a little different than maybe some other South Florida markets, is there's a regular crew that comes every year to Naples. And A lot of them have homes down there. Their families come to visit. That generates a lot of demand. And we expect them to come back pretty quickly. And in the meantime, there's a lot of demand in the market, and we're seeing it downtown at In-On-Fifth from folks who need to come to the market for either business purposes or to deal with issues related to their homes that are down in the marketplace. So it's pretty hard to forecast at this point, but I would think it would come back pretty quickly, Dori.
spk02: Okay. And have you noticed any change in the behavior of meeting planners that would make you think recession worries are weighing on them, whether it's time to sign, just long negotiations, attempt for lower out-of-room spend?
spk10: No, we haven't seen any of that.
spk05: Okay. Thank you.
spk09: Thanks, Dori.
spk05: Thank you. The next question is coming from Jay Kornreich of SMBC. Please go ahead.
spk13: Hey, good morning, guys. Just curious if we can kind of discuss your current thinking on portfolio repositioning, if strategically it still makes sense to continue selling out of the urban markets and investing into leisure resorts, or if maybe the potential oncoming recession makes you rethink that strategy.
spk10: Yeah, I mean, I don't see any change in the way we've been modifying the portfolio. Our objective was really to get a more balanced segmentation between business and leisure in the portfolio. And we're pretty close to that level now. I think we're between leisure and leisure transient and group. I mean, our estimate is we're about 50-50. So I don't see a lot of change to that focus. I don't think we will be selling resort properties because of our sort of long-term secular view of the opportunity there and the difficulty of adding new supply, competitive supply against those properties in the very long term. And in the meantime, we'll continue probably I mean, our objective is to recirculate capital out of some of the urban markets and use that capital elsewhere.
spk13: Got it. And I guess maybe in a similar, more near-term aspect of that, that should a recession arise over the next year or so, would you expect more vulnerability on the business transient side, which is still recovering lost occupancy? or more of the leisure training side, which has been far outperforming historical standards at this point?
spk10: You know, it really depends on what kind of downturn it is. You know, we always throw the word recession around like it means the same thing all the time, and it doesn't. Each of the recessions I've lived through, five or six of them now, they've all been different. and they've had different impacts. Some have been consumer-focused. Some have been business-focused. I think this one will be different for a lot of reasons. I think with the challenging labor markets, I think it won't be, and I don't think it'll be likely to be an employment-led downturn. And there's continued to be plenty of open jobs. And Businesses, I think, are looking at their employees and hoping that they'll be more sticky. So I don't think we'll see the same kind of layoffs that perhaps we've seen in other recessions where unemployment has gone up to very high levels. Like in the last downturn, that was driven by the great financial impacts that caused the recession. The other thing is it's likely that this is going to, again, like most recessions but not all, impact more folks at the bottom end of the market than the top end of the market. And then the third thing I'd say is we're going through what I would describe as a continuing secular change of consumers' desire to spend money on things versus spending money on experiences. And so I think all of that leads to the likelihood that any recession or slowdown has less of a traditional cyclical impact on our industry and whether it's greater on the business group side or group is usually the first thing cut in a downturn because it's what makes a major difference from a financial perspective, has the most impact. I just don't know if we're going to see that this time given the lack of group meetings over the last two and a half years and the pent-up demand that exists and the need businesses have to get people together. So it's a hard thing to forecast, but I think the one thing we feel pretty good about is that the impact on the industry will be less than a typical, any typical downturn would be. And we still have some strong countercyclical tailwinds of our business recovering to more normalized levels.
spk13: Okay, thank you. That's very helpful, Connor. Appreciate it.
spk11: Thanks, Jay. Thanks, Jay.
spk05: Thank you. The next question is coming from Smeets Rose of Citi.
spk04: Please go ahead. needs, please make sure your phone line is not on mute. We'll move on to the next question.
spk05: It's coming from Floris Van Dykem of Compass Point. Please go ahead.
spk12: Morning, guys. I had a question on getting back to capital allocation. As part of, I think, what helps to explain your view on the resort markets? I mean, we looked at your seven resorts that you've held since 2010. Now, some of them were obviously LaSalle held at the time, but, you know, be it as it may, I think they've averaged something like 8% annual CAGR in hotel NOI. As you think about... you know, going forward and obviously went through some, you know, turbulent times from 2010 to 2021. Do you think, you know, that's repeatable or have you milked enough of your properties or are you looking to, you know, get more things, you know, more assets like this, like for example, with the Gurneys and the Estancia acquisitions?
spk10: Yeah, Flores, I mean, I think as indicated by the investments we made over the last couple of years, both what we've acquired and what we've disposed, it probably gives an indication of where our thinking is right now. As we've reached this more balanced level, we feel a lot more comfortable with our city exposure. But for the very long term, and we're a long-term investor, right? I mean, we don't look at these things as opportunities to make a quick buck in a year or two. We really look at where do we want to be over the next 5, 10, 15 years. And we do think there's some very positive continuing secular trends, as I mentioned, in the desire of consumers to, I don't know, collect experiences or have experiences driven by social media, the sharing of those online with your friends and family. And I also think at least for the next few years and maybe longer, you know, a desire on the part of businesses, some businesses to maybe favor meeting in outdoor areas or resorts versus meeting in major cities that have sort of come out of the pandemic. So we do have a little bit of a bias long term towards the leisure customer versus business travel. But I don't think we see overall business travel trends changing dramatically from the last 50 years where business travel has generally followed GDP growth.
spk12: Thanks. And maybe if I could follow up. Obviously, there's some noise around La Playa for the fourth quarter, and presumably some of that could bleed into the first quarter a little bit as well. Excluding La Playa, you're essentially at 19 levels of profitability already, despite the fact that your occupancy is still lagging significantly. How confident are you about your 500 million hotel EBITDA estimates as you look into 23 and 24? And how quickly you know, do you think you can achieve that? Is that going to take two years? Is that going to take, you know, could that even, you know, could you achieve that by the end of next year, potentially?
spk10: Yeah, I mean, I think, well, first of all, I think we feel very good about the bridge that the resorts this year are going to run. Right now, they're forecasted to run about 60 million over 2019 levels. When we look at the operating cost side, as we discussed, we think we've saved very significantly on the bottom line. And as occupancy comes back, it should deliver at pretty good margins because of the high fixed cost nature of our business overall. So I think we feel good about the bridge, the share gains we've been making and expect to continue to make in these properties that we've completely repositioned to different levels where we're picking up, you know, very strong share gains in rate and ultimately rev par as demand continues to recover. Will we get there by the end of next year? I doubt it. I think, first of all, some of these projects were just completed earlier this year or mid-year, like the one. Some of them take time to regain that share at these higher rates. I mean, we've raised rates at Low Bears by $200 to $250 compared to where it was pre-development, and it takes time to rebuild that clientele, because it's not the same customers. It's trying to find higher-end customers willing to pay for that higher-end experience. So I do think it'll continue to take time. I think we feel good about next year. Let's leave the macro out of it for a moment. None of us know what that's going to look like, and none of us know how it's going to impact the business. We're not going to shake being cyclical, but we have some pretty strong countercyclical tailwinds, not the least of which is supply growth has already fallen below 1%, and that's going to go much lower over the next couple of years. Right now, we're not forecasting supply growth to recover to 1% or more growth until the 2026-2027 period, and that would be consistent with sort of peak to trough and recovering supply growth history. And here we have it stretched out because we had both a pandemic, which obviously dramatically slowed starts, for which we're benefiting from that now. And now we have a fear of recession and difficult capital markets that have slowed starts even further and for a longer period of time. So we feel good about getting there. We think the rate growth is probably even more fixed than what we thought a year ago, particularly in the resorts. But all of our urban markets continue to surpass 2019 levels as they recover. So time, if we have a significant downturn and it impacts the travel industry, which cyclical downturns usually do. Again, we think it'll be less, but that tends to slow your ability to regain share. You really need a growing demand environment to have material impacts there.
spk11: Thanks, Sean. Thanks, Lars.
spk05: Thank you. The next question is coming from Neil Malkin of Capital One Securities. Please go ahead.
spk16: Thank you. Good morning, everyone. Good morning. First one, you know, saw a report that you guys may have, you know, a couple more assets on the market for sale. Can you maybe talk about how you see capital priorities at the current moment, just given the sort of headwinds that we might be facing?
spk10: Sure. Well, as we've indicated, we believe we'd be a net seller this year. We've had additional properties on the market, and we've also indicated that the debt markets have gotten, obviously, more difficult over the last 90 to 150 days, I think. And so our desire to sell will obviously still be dependent upon value. And then what we do with that capital will depend upon what the other opportunities are at the time. Earlier this year and last year, those opportunities were primarily in properties that we could acquire that were leisure-focused, where we could make some very significant improvements and generate high returns. And as we look forward, what we do with any capital that comes out of proceeds will depend upon what the environment is at the time and where valuations are, not only for assets, but for our own stock and debt in our preferred. So all of the allocation opportunities are on the table and they'll depend upon what the opportunity is at that time.
spk16: Okay, great. I don't want to burn my second question, but just to clarify that, right now, are you more biased toward paying down debt or buying back stock?
spk10: I think it's going to depend upon how these things move around. I think we feel very comfortable with where our debt is. I think we have a very strong balance sheet. Our interest cost is low. Most of it is fixed. And our debt to EBITDA is about where it was pre-pandemic when you assume Q1 at the same kind of run rate that obviously we've recovered to already here in Q3 and Q4.
spk16: Okay, thanks. And the other one for me is, I guess, maybe continuing down the capital allocation path. Commentary from different industry participants, data providers, suggest that there's a fair amount of potential distress coming in terms of CMBS maturities. The brands are getting more firm on requiring PIPs and not deferring them anymore. Same with lenders. And the debt markets are obviously, like you spoke to a few minutes ago, are very unfavorable. Can you just maybe talk about how you see the potential to be opportunistic and take advantage of a potentially attractive environment to buy assets potentially at some distress and how you're positioning the balance sheet to potentially do that in some form or fashion?
spk10: Yeah, I mean, I think the way we've always looked at the world, and we've talked about this in the past, is A, we're opportunistic in our approach, just as I was just describing in terms of where we might allocate capital. Second, I think what we've found in these downturns is it's not really about taking advantage of distress as much as it's taking advantage of an opportunity to buy assets that you really want that might not otherwise trade or be forced to trade in a more favorable environment. And so that's really the way we're approaching it. And when we think about, you know, it's funny when you think about distress and if you look at the market or the upcoming market, what's the distress that's built into the valuation of our stock already? And so that, again, back to what we were talking about, that'll be a consideration as we move forward as to how we allocate capital.
spk16: All right. Thank you. Appreciate the time. Thanks, Neil.
spk05: Thank you. The next question is coming from Smeets Rose of Citi. Please go ahead. Hey, good morning.
spk03: This is Maddie on for Smeets. Can you hear me?
spk12: Yep.
spk03: Okay, great. Apologies if this has been asked already, but I saw you took the full year guidance range down by $10 million. Is that more of a function of reducing scope or pushing projects to next year? And then as a quick follow-up to that, what are your kind of initial thoughts on what next year could look like specifically about the Newport asset?
spk10: Sure. I mean, the capital was really just how – it's more of a timing issue than anything. Obviously, we don't know. when dollars can get invested, there's longer lead times in certain equipment replacement and other things like that. So it's not a change in scope. Maddie, it's all just about timing of capital. So if it ends up lower than our range, as an example, it's capital that would end up probably being put out in the first quarter of next year. And then as it relates to Newport, as I indicated, we've removed the Gurney's flag. We've changed the name to Newport Harbor Island Resort, which I think is representative of exactly what it is. It's in Newport Harbor. It's an island, and it's the only resort really in the Newport market. Our focus this year is on planning. We've been going through a full plan for both getting deferred capital invested in the property, fixing stuff that's broken that we've talked about previously, and then the plan of repositioning the property higher, providing a higher level experience to the customer that they're willing to pay more So the timing of it would be a lot of the capital maintenance, deferred capital maintenance is both ongoing and through this winter, particularly making one of the buildings a little more secure from the weather, which it wasn't when we bought it, which we knew. And then the upgrades will be primarily the winter following. So the 23-24 winter given the time it takes to design, go through the plan, make the building weather protected, and then do the interior and exterior improvements that we're going to do with the property.
spk03: Okay, great.
spk05: Thank you.
spk11: Thank you.
spk05: Thank you. The next question is coming from Duane Fenningworth of Evercore ISI. Please go ahead.
spk08: Hey, thank you. Good morning. On your comments regarding urban markets leading the improvement in 3Q, was this a leisure-driven improvement or BT? I mean, I'm just thinking about some commentary from the likes of United about extended leisure peaks. You know, every weekend now behaves like a holiday weekend. I'm not sure if you'd take it quite that far, but where would you push back on the view that this was all sort of leisure-driven improvement in urban markets?
spk10: Well, first of all, we have a lot of properties where our corporate transient business is actually at or above 19 levels. So as we track, just like the airlines do, Duane, obviously we track the accounts that do contract with us and their use, and we've seen a dramatic increase in that level of of use of corporate accounts. So that's one indicator we look at. Clearly, our group business is up in our city markets. That is primarily a business group. We don't do a lot of leisure groups in our cities. We do some, but most of the leisure group is in our resort properties. Honestly, it's not even in question about the increase in business, transient and group, and citywide business. And we look at the attendance there and the pickup in those group blocks, which has increased dramatically in the third quarter versus earlier in the year. And then we look at weekday occupancy, which is a pretty good proxy. So you look at your Tuesdays, your Wednesdays. in particular right midweek, and those occupancies are up four, five points sequentially from the third quarter.
spk08: That's a good answer to that question. My follow-up is more of a comment than a question, but to the extent you are repositioning food and beverage in Naples, here is one vote for bringing back the caves, and thanks for taking the questions.
spk10: Thanks. Well, Phil, Phil McKay, he'd be really happy if we did that, but he was the one who eliminated it.
spk08: Thank you.
spk10: You might have to call it something else, Dwayne. Sportsism. No, I don't think so, but thanks for the suggestion.
spk11: Doesn't have a very good ring. Go ahead, Donna.
spk05: Thank you. The next question is coming from Anthony Powell of Barclays. Please go ahead.
spk07: Justin Cappos- hi good morning, I had a question on I guess the leisure red part growth, I guess algorithm for for next year, particularly in the resort side, and then you mentioned that. Justin Cappos- rate has been very strong, obviously, but is still below prior peaks where's incremental occupancy going to come from for the resorts. Justin Cappos- House pricing looking like next year on top of these these great levels now I guess what's the prospect for continued red part growth next year, and this kind of excluding kind of like renovation bumps.
spk10: Yeah, I think most of the recovery at our resorts is going to come from two areas. One is the return of festivals and market events and activities in those markets and a willingness on the part of the consumer to participate in those larger human activities, if you will, meaning they're more comfortable with the state of the virus in society and the risk they're willing to take. But probably the bigger one would be the return of group, which we've been seeing, which we do a lot. Again, I've talked about this in the past. We do a lot of group at our resorts. I mean, we do, historically, we do 60,000 plus rooms at Paradise Point, as an example. We'll do almost 50,000 at Mission Bay Resort. We'll do 30,000 plus at Margaritaville. So the return of group, which has been occurring, will continue to add occupancy to the resort properties in the portfolio. Now, the rates will not be at the same level as leisure. So the average rates at some of those properties that are bringing back group are going to be bringing it back, that occupancy back at a lower rate, but it's going to positively impact REVPAR and have a very positive impact on F&B and other revenue at the properties that will help deliver higher EBITDA at the bottom lines. And the rates they're coming in at next year, I think are overall for the portfolio, I don't have the resort alone handy, but overall in the portfolio for 23 year over year, we're up about 14% in group revenue on the books versus where we were a year ago for this year. And about half of that, a little under half of that is rate and a little more than half of that is, is group. And Gabby's flipped me, um, the pace on resorts, the rate's up $30 at our resort property. So, again, it's about the same level. It's probably 6%, 7% when you think about where that is compared to this year.
spk07: Thanks for that. And maybe just one more on the dividend. Could you remind us where your NOL position is, I guess, in the broad sense, dividend policy? Some of the other peers are starting to starting to instate more meaningful dividends here. So maybe what's the outlook for you on that front?
spk09: Sure. Well, based on our current outlook, it would imply about $100 million or so of NOLs that we'll be bringing into 2023. And then we'll see what next year looks like on how those would be used up. And of course, those could also be used up not just from positive operating performance, but also sales if we have some gains. So that obviously will move around a little bit. But I think given where our view of the world is, unless there's a significant change in the outlook due to the macro challenge, having some sort of dividend as we get into the second half of 2023 is likely will be required because we would use up our NOLs and our positive income would require one. So we'll work through that. Obviously, it has to be approved by the board, but you should expect something, unless there's some unusual thing in the world that occurs sometime in the second half of 2023.
spk10: And I think one answer to a question you didn't answer, but I think is relevant, is if we had no NOLs today, our forecast for 23 would be a need to pay about $1 a share.
spk09: Yep. Yeah, depending on your assumption, the outlook there. But if you assume we're at the kind of 2019 kind of run rate, that would be about $1 a share of dividends that we required based upon the taxable income.
spk07: All right. Thank you for that. Very helpful.
spk05: Thank you. The next question is coming from Sean Kelly of Bank of America. Please go ahead.
spk01: Hey, good morning, everyone. John Ray, you know, just as we think about the outlook for fourth quarter and I know the lead times here are relatively short, but can you just give us your thoughts on sort of the interplay between, you know, I think the two big themes that a lot of people we talk to are interested in, which is, you know, the state of the urban recovery where all the signposts continue to sound like they're moving in the right direction. relative to, you know, the tougher comps and maybe a return to seasonality on leisure. I mean, when we put those together relative to your outlook, it's looking like Q4 comes out, you know, if we adjust for La Playa, Q4 comes out pretty similar to Q3. And I guess what we're sort of asking or wondering is, why don't we have another leg in the urban piece, especially when you think about the occupancy, you know, some of the recovery and some of your specific markets and some of the renovation capital you put in. So maybe you could just help us think about why we don't have kind of another leg up from here.
spk10: Sure. Well, it would really be three things, Sean. One is we did have a small impact from the hurricane in the first week to 10 days in October beyond La Playa. So obviously the hurricane went through Florida and up the coast. And we had a lot of cancellations at that weekend and into early the next week at places like Jekyll, at Margaritaville, and even in the Naples market and Key West where the hurricane hit right before it went through Naples. So there was, again, it's all at the margin, but when we start talking about an improvement of additional three points or four points in a quarter and you lose one or two of them, to a hurricane. So they're meaningful. The second thing would be we do have some redevelopments in the urban markets commencing in the fourth quarter, assuming we get our permitting. They're soon to start in downtown San Diego, both the Hilton Gaslamp as well as the commencement of the conversion of Solomar to Margaritaville. In fact, we already started the exterior work at the Solimar where we're painting the exterior of the building the Margaritaville green color, if you will. And then the third thing was, as we were talking about earlier, the sort of return of normal patterns, if you will, and the impact of things like convention calendars in a market. Boston, D.C., San Diego all had great third quarter calendars compared to 19, but the fourth quarters aren't quite as good. So, again, it's an impact at the margin and it's probably, you know, at least in our numbers, perhaps maybe not others, but in our portfolio, it's having some impact on the sequential improvement compared to 19 in the fourth quarter. But keep in mind, again, the high end of our range, excluding La Playa for REVPAR, is flat. I mean, is up 1.5%.
spk01: Right. Thank you for that. And I know there's probably some conservatism in there a little bit, too. So then I guess the second question would just be thinking about, you know, maybe a little bit broader for the industry. It does feel like in recent weeks, as we cut the data down, you know, urban occupancy has probably leveled out more broadly, even sort of, you know, not in just just Pebble Brook's markets. You know, you guys watch the industry stats as close as anyone, can you just give us your thoughts on, you know, I mean, is this kind of it? Or do you think, you know, there's something else that can kind of drive or change corporate behavior increasingly from here? You know, again, I think, you know, we were probably a little bit more optimistic about that a month ago, or six weeks ago, and I'm kind of curious to get your take.
spk10: Yeah, I mean, I don't think this is it. I actually think we have a long way to go sequentially. We're just going into some seasonally slower periods for business travel. And as we indicated, the return of sort of the normal impact of holidays like Halloween, which is negatively impacting, again, the week before and after Halloween or half of the week before and half the week after, which is why we want to move Halloween to Saturday night every year. And so I don't, I mean, we look at our markets and we look at what we're seeing on the corporate side. I mean, Santa Monica, which had been slower to recover on the corporate transient side because of its sort of tech and VC focused, you know, the reports we're getting from our properties are, we're moving back to hitting transient levels that were similar to 19. And again, I think it's just going to continue to happen around the country and the different urban markets that we're in. So I don't really think it is leveling out. I think we have to be careful that the normal seasonal slowdown as we head into mid-November and beyond all the way until March is it is not going to be a sequential growth over the prior months because it's seasonally slower.
spk09: Yeah, and Sean, one kind of constraining factor also that does have impact on business travel is airline capacity. And that's something where we've seen, we tracked the TSA data, that's been up in the 90-95% range to 19, and that's not moving much. That's because of lack of pilots. But as you heard from all the airline calls, they're training and they're pumping out more pilots. So that should help improve the restoring capacity there, which is what it was pre-pandemic. So as we get more airline capacity, and I don't know if you've been in a plane recently, but every seat's full, even though the planes are slowed down. But as we get more, that should allow more flights and more opportunities for business travel.
spk01: Yeah, thank you very much, Ray. Appreciate it both.
spk11: Thanks, Sean.
spk05: Thank you. The next question is coming from Michael Belisario of Baird. Please go ahead.
spk15: Thanks. Good morning, everyone. Just one P&L question from me. Did you guys see any expense pressures tick up during the third quarter, and are you seeing anything improve or worsen now that we're in 4Q or as you start your budgeting process for 23?
spk09: Well, energy. Energy is being a pressure and will continue to be. So that's an area where it's only calling out the whole side about other inflationary costs like labor and input costs. You know, we've had a lot of the labor increases during the year strategically to attract the best talent to our hotels. So I would say there's probably less pressure there on a year-over-year basis than maybe it was earlier. And input costs continues to stay high. But that's the one area that will continue to be up is the energy side. And that's going to be a tough winter.
spk10: I think one other thing that we have to look forward to, and frankly, we don't know what the timing is because we have to deal with the governments around the country, but we have claims in for the last few years for property tax assessments that in many cases did not decline with the pandemic. And We think there's going to be very significant wins there. I mean, millions and millions of dollars of savings, but it's going to take time. In some cases, it could be as much as five years from the assessment year. And in other cases, if there's ultimately resolution before litigation, that may be two or three years. So we're getting close to some of those, hopefully getting beginning to get resolved. And ultimately, we should begin to see some mitigation of the property tax increases that we've continued to see, despite the obvious negative impact on our industry from the pandemic.
spk15: Got it. And just one follow up there. Are you seeing any divergence between urban and your resort properties on the expense side today?
spk10: I don't really. I mean, the resorts have probably gone up a little bit more just because they tend to be in resort locations where there's a lot of competition. It was an industry that came back first. The cities tend to be more, in many cases, fixed and following the union contracts in that market, regardless of whether you're union or not. So So I think that would be the only difference I would highlight. I think one of the benefits we have seen, Mike, is both the return of H-2Bs and the J-1 program, but also the administration approved going up to the max number of H-2Bs, which had never been done before. And that will help our industry, particularly the seasonal resorts.
spk04: helpful. Thank you.
spk05: Thank you. The next question is coming from Gregory Miller of Truist Securities. Please go ahead.
spk14: Good morning. I wanted to start off following up on your comments on the tech industry. Could you share what your current expectations are for tech travel budgets for 2023, either compared to 2019 or 2022? Yeah, I mean, I think that's
spk10: Unfortunately, probably a better question for the brands who have a much broader view of that than we do. We've seen a continuing, fairly rapid increase more recently on the tech side in their travel and probably coincides a little bit more with their efforts to return to the office, which we are seeing an increasing number of. the tech firms coming back to their office. So, you know, the markets for us where we see it are obviously San Francisco and Seattle and, as I mentioned, Santa Monica, what they call the Silicon Beach. And so I don't know where that will end up. I never believe any of these surveys about budgets or, you know, comparisons. I think travel... frankly, is much more controlled by the employees in the organization than it is by senior management. So outside of that occasional announcement like Google made about only essential travel, which that's always a debatable issue, obviously, by those who want to travel.
spk09: We think all travel is essential.
spk10: We have a small industry bias.
spk09: And also, Greg, just so you know, the tech industry has been a lagging industry in the recovery since the pandemic as it relates to travel demand. It's really been other industries like the entertainment industry, life sciences, consulting. A lot of other sectors have been coming back more than the tech. And recently, the tech has been coming back. But certainly, that's been a noticeable industry that's been not bouncing back as quickly as others have.
spk14: Thanks, gentlemen. On my follow-up, I thought to ask about the two Westerns in Boston and Chicago. Combined, as you know, these hotels were about 50 million of hotel EBITDA in 2016. Could you share roughly where these hotels are likely to finish this year, or more broadly, how you see the recovery for these hotels over the next couple of years?
spk10: Yeah, I mean, Copley looks like it's running pretty darn close to 19 EBITDA, give or take $1 or $2 million, depending upon how the last three months end up. So clearly a great and pretty quick recovery in that market. Rate is up significantly now over 19, and group bookings for next year look really good. are tracking very close to 19, but with rate up, I think, about 5% over 19. So I don't have a comparison back to 16. Weston Michigan Avenue, obviously, much slower market to recover. And I don't recall offhand Ray, where we are, it's probably down a lot from 19.
spk09: Yeah, we're so likely down 40% to 50% to 19 on an EBITDA basis.
spk10: But the summer in particular and into the fall, we've seen a really nice recovery in business transient and group at the West and in Chicago.
spk00: Great. Thank you both.
spk05: Thank you. The next question is coming from Bill Crow of Raymond James. Please go ahead.
spk06: Good morning, guys. John, not to beat the whole sequential change to death, but when I think about the same store rev par versus 19, right, going from up one and a half to flat at your midpoint, X will apply. I think you said there were three items there, the hurricane impacts, rental disruption in San Diego and seasonality. If we throw seasonality out, because I assume seasonality was around in 19, right? And no reason calendar changes or anything that we should know about. But can you quantify the hurricane? If we didn't have the hurricane impact and maybe if we didn't have the renovation disruption, although I'm guessing how active you were in 19, you probably had some disruption there. Where would that theme store rev par guidance be for the fourth quarter?
spk10: Yeah, and Bill, just to clarify, the comment about Q4 compared to Q3 wasn't about seasonality. The third point related to how the convention calendars fall. And so when we look at that, and again, it all compares back to 19, but the comparisons were not as good for San Diego, for Boston, and for D.C., which are obviously a meaningful part of our portfolio. And then when we look into next year as an example, the calendars for San Diego, Boston, and D.C. are actually all up at least for the year compared to 19, but I'm sure they're going to be And compared to this year, they're up. And I'm sure there'll be some quarterly movement from around in all of those markets. But I don't know that offhand. So, you know, the impact from the hurricane, we don't have the numbers in for October's. The impact from October, we'll get those in about two weeks from the property teams. And you're right. I think we did have some redevelopment impact in 19, although I don't recall exactly which properties it was.
spk06: Okay. It's an interesting discussion. That's one I'm having increasingly with investors. And I think Sean went through that dialogue as well. There's some suspicion that things are potentially stalling a little bit. I want to make sure that we understand the progression from third quarter to fourth quarter.
spk10: Thanks, John. Yeah, thanks. And I think it's, look, if it was stalling, we'd tell you. If we saw indications of that, and we've looked at others, we look at Visa, we look at American Express, we look at the airlines for the fourth quarter, and it doesn't appear that any of them are reporting a stall in the recovery. So, But I promise you that we'll let you know if we see it.
spk06: I appreciate that. Thanks for the time. Sure.
spk05: Thank you. Our final question for today is coming from Chris Darling of Green Street. Please go ahead.
spk17: Thanks. Good morning. John, can you speak to the downward revision of your internal estimate of NAV? Maybe elaborate a bit on what you're seeing in the transaction market and how values may have changed across some of your markets? Sure.
spk10: Yeah, we continuously evaluate the values of each individual property and take into consideration all the meaningful factors. What is the sentiment in that market? Is it union? Is it non-union? Is it unencumbered? Is it encumbered? Is it management encumbered? Is it brand encumbered? Because those have negative impacts, and obviously unencumbered has a positive impact on values. What's going on in the debt capital markets? What's the equity flow? And basically, what are the transactions and what's going on in the pricing and the values of those transactions, whether they've been reported or ones we know that are being completed and what the pricing and valuations of those are in the marketplace. So we take that into account. Obviously, in the last quarter, what we've seen is a continuing increase in the challenges related to the debt capital markets and an increase in the cost of debt capital and a decrease in the availability of debt capital. And that is impacting levered buyers in the market and impacting values in the market. The mitigation to that continues to be how values are determined based upon increasing confidence in recoveries, both ongoing and expected. on a go forward basis. And then ultimately also, I'm sure buyers take into account as we do, you know, what does the macro look like and what are the risks there? So the long, I want to provide that background because the result is what we delivered to you, what you're commenting on, which is the ultimate result of that, of looking at values on each and every property on a sophisticated basis, based on transactions and buyer sentiment, was a reduction of about $330 million in the value of our assets in the portfolio, which is about $2.50 a share. So the range came down 2.50 from low to middle to top end, and it's now between $27.50 and $32.50 for those on the call who haven't gotten through the investor presentation yet like you have, Chris.
spk17: Got it. I appreciate that, Keller. It's helpful. And then just quickly, I want to return to a point you made around margins and the opportunity to improve bottom line performance as occupancy continues to come back. You mentioned that expenses become relatively fixed at a certain point of demand, and I just wonder how close we are to that inflection point, I guess I'd call it. I know it's tough to kind of measure this on a portfolio basis, but I just wonder how we should be thinking about the trajectory of expenses from this point forward, excluding really any CPI-related cost increases.
spk10: Yeah, and I didn't mean to say that we get to a point where they're almost all or all fixed. Obviously, there's always marginal expenses related to both labor and materials, but revenue volume does matter because when you have a full team of all of your people, primarily your management people, and you have a lot of your other expenses, insurance, taxes, things like that that are fixed and don't vary based upon those volumes, your flow obviously for every dollar ultimately improves as your total occupancy and your total revenue base improves. So you just end up getting much better flow on a marginal basis than what we've gotten in prior quarters.
spk17: Fair enough. Understood. That's it for me. Thank you.
spk05: Thank you. At this time, I'd like to turn the floor back over to Mr. Bortz for closing comments.
spk10: Hey, thanks, everybody, for participating, those who are still here, and hope you enjoyed the song that we provided for you. It's a classic. And we look forward to seeing you in San Francisco at NAIRI.
spk05: Thank you. Ladies and gentlemen, this concludes today's event. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.
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