Pebblebrook Hotel

Greetings and welcome to the Pebble Brook Hotel Trust fourth quarter and year-end 2022 earnings call. At this time, all participants are on a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Raymond Martz, Chief Financial Officer. Thank you. Please go ahead.

Thank you, Donna, and good morning, everyone. Welcome to our fourth quarter 2022 earnings call and webcast. Joining me today is John Bortz, our chairman and chief executive officer. But before we start, a reminder that many of our comments today are considered forward-looking statements under federal securities laws. These statements are subject to numerous risks and uncertainties, as described in our SEC filings. Future results could differ materially from those applied by our comments. Forward-looking statements that we make are only effective as of today, February 22nd, 2023, and we undertake no duty to update them later. We'll discuss our non-GAAP initial measures during today's call, and we provide reconciliations of these non-GAAP financial measures on our website at pebblebrookhotels.com. Okay, in 2022, we made significant progress on our road to a full recovery. We want to thank our hotel teams and operating partners for their hard work, sacrifices, and creativity. Our portfolio continues to benefit from their tremendous effort as we continue on the path of recovery and growth following the pandemic. Our adjusted EBITDA finished at $356.7 million compared with $99.8 million in 2021, a very significant progress from a year ago. And while we still have much work to do, we believe we have considerable upside ahead. Adjusted FFO per share ended in 2022 at $1.69 cents, a substantial improvement from 2021 at a negative 23 cents per share. On the investment side, we were very active. We acquired two leisure-focused resorts for $330 million and sold four urban hotels for $261 million. Since 2020, we've acquired six leisure-focused resorts for over $820 million, while selling 11 hotels in slower-to-recover urban markets for a total of $957 million. Between acquisitions and dispositions, since 2020, we've recycled almost 30% of our portfolio, representing a dramatic transformation of our company. As a result of these investments and divestitures, we have increased our market segmentation from leisure, both group and transient, to roughly 50%. And we are extremely excited about the many operating, re-merchandising, and redevelopment opportunities at our recent resort acquisitions, some of which are already underway, which John will discuss later. We expect that these major projects will generate outsized growth over the next several years. For the fourth quarter, same property total revenues of $310.6 million for 94.1% recovered to 2019. And this was driven by continued solid demand at our resorts and further improvement in group and transient business travel. And these results exclude La Playa Beach Resort due to its closure from Hurricane Ian, which negatively impacted our same property report growth by approximately 150 basis points and an estimated $16 million in property revenues and 12 million of same property EBITDA. In terms of markets, we continue to experience solid demand in Los Angeles, San Diego, and Boston. And encouragingly, we are seeing the demand recover, accelerate in our slower to cover markets, including San Francisco, Chicago, and Washington, DC. Shifting to Q1, 2023, Demand and operating trends have generally been in line with expectations, excluding the impact of the severe winter storms we've experienced to date in the first quarter. The significant rainfall fall in northern and southern California disrupted leisure travel to these markets, and then cold temperatures in Boston disrupted business travel and caused some water damage, resulting in an estimated $1.1 million in additional operating and capital expenditures, which also includes estimated costs to remediate and clean up following these multiple storms. On the demand side, despite the numerous layoffs announced across many industries, we have yet to experience any notable changes in demand, booking activity, or increasing cancellations. Leisure demand remains healthy despite concerns about the consumer becoming more cautious. Except for some softer demand in Key West, which was robust and relatively price-insensitive in 2021, when Florida was one of the few states to fully open for business, our leisure-oriented demand is maintaining its strength. Demand started the year on encouraging note in San Francisco with a JP Morgan healthcare conference in early January. Compared with 2020, the last time JP Morgan was held in person, demand at our hotels was at 76.8% of 2020 levels with ADR up 9.7% and overall revenues at approximately 84% of the 2020 conference levels. This is a very positive start to the year for San Francisco, which we expect will continue with a much improved convention calendar this year. Overall for the company, January same property repar was up a very strong 49%, benefiting from easy comparisons to the Omicron impact in January last year. We anticipate same property repar for Q1 to be 15% to 18% higher than Q1 last year. Not surprisingly, the quarter's repar growth was slow substantially from January's growth rate versus last year as Omicron eased as the quarter progressed. Our Q1 operating results would be negatively impacted from the closure of apply it for repair and remediation work due to Hurricane Ian, which will reduce our Q1 hotel revenues by an estimated $25 million and same property EBITDA by approximately $14 million. In addition, we will experience displacement due to several major transformational projects underway. This is expected to negatively impact Q1 REF PAR by approximately 225 to 300 basis points and overall same property EBITDA by $4.5 to $6.5 million. These include the comprehensive redevelopments at Hilton Gaslamp San Diego, Solimar as it converts to a Margaritaville in downtown San Diego, Estancia La Jolla, Jekyll Island Resort, and Viceroy Santa Monica. Combined, the disruption that will apply from Hurricane Ian in our redevelopments will negatively impact Q1 same property EBITDA by approximately $18.5 to $20.5 million. Shifting to our capital improvement program for 2023, we are targeting to invest $145 to $155 million into our portfolio, including several major redevelopments that we're very excited about and we expect will generate healthy returns on our investment. John will discuss this year's strategic redevelopment projects and overall programs in more detail later in our remarks. Also, as we detailed last night's press release, we have made substantial progress in repairing and restoring La Playa. We reopened the property's bay tower and expect to partially open the Gulf Tower shortly. The Gulf Tower houses the lobby, restaurant, bar, and club areas, so it's a significant component of the resort. We'll also open with one of the three pools and a temporarily relocated spa and fitness center. The beach has been cleaned and reopened, and we'll be providing full beach services to our resort and club guests. Our beach house, however, is still undergoing restoration work. which we expect to be substantially complete in the fourth quarter. We've received $25 million so far from our insurance providers to complete the necessary repair and remediation work. We expect additional proceeds from our insurers for the work needed to fully restore this fantastic resort shortly. Upon completion, it will be better than ever, and we expect it will be quickly returned to its pre-hurricane performance. We're also expecting the first preliminary installment of business interruption proceeds, in this case $7.2 million for lost business during the fourth quarter of 2022, which is net of our $2 million BI deductible. This has been incorporated into our Q1 outlook and will hit other income and benefit adjusted EBITDA and adjusted FFO. We expect to receive additional BI proceeds for Q4 2022 and 2023 later in the year or by the time we reach a final settlement and we'll update you accordingly as we progress in this area. Turning to our balance sheet and other capital uses, since the start of the fourth quarter of 2022, we have utilized proceeds from prior dispositions to repurchase 5.5 million common shares, or just over 4% of our outstanding shares at a weighted average share price of $15.12, a roughly 51% discount to the midpoint of our recently updated NAV. In addition, We repurchased 1 million shares of our series H preferred equity at a 36% discount to par or $16 per share compared with the $25 per share par value. We also used disposition proceeds to pay down debt last year. Our board has authorized an additional $150 million common share repurchase program, which combined with the remaining unused portion of our prior authorization implies we have $224 million available for common share repurchases. The board also approved a $100 million preferred share repurchase program. As we sell additional properties, we will evaluate how to best utilize our proceeds, including reducing debt and or additional share repurchases, depending on our outlook on the economy and how our performance progresses. If we do utilize some portion of the proceeds for repurchasing our stock, which we believe is currently trading at an approximate 50% discount or at net asset value, We do so only while reducing our debt no worse than a leveraged neutral basis. And we have been comfortable taking advantage of the public-to-private valuation arbitrage for several reasons. First, our net debt is just 43% of the net book value of our assets, which we believe is very reasonable. Assuming that $750 million of convertible notes, which comprises about one-third of our total debt, are converted to equity before the maturity in late 2026, this would drop to 29% of debt to net book value. Second, our net debt to our estimated NAV is also a reasonable 33%. And third, most of our debt, over 90% in fact, is unsecured bank debt or notes, largely held by our bank group, with whom we've had relationships for many years and several decades for some of them. These relationships go well beyond just a lender-borrower relationship, whether it's investment banking, substantial cash deposits, credit card processing, and many other services, we are a very attractive client to our banking partners. And as we've seen during the depth of the pandemic, relationships do matter. We are one of only a handful of hotel rates that did not have to secure our debt during the pandemic. This highlights the confidence and trust our banks have in us. In addition, only $220 million, or less than 10% of our debt, is secured property-level debt, of which Only $162 million will mature before 2028. That is very manageable. Finally, our existing liquidity is very substantial. We have more available than we did before the pandemic. Our $650 million unsecured credit facility, which is largely undrawn, provides flexibility while reducing any refinancing risk. And our average debt cost is currently just 3.5%, perhaps the lowest in our industry. And this, of course, enhances our cash flow and our fixed charge ratio, which reduces risk. In addition, 75% of our debt is fixed through the end of 2023, and 63% is fixed through the end of 2024. And we used a very attractive window of the market in January to complete $400 million of swaps for two to three years to effectively extend swaps that expire this year. So the cost to service our debt is very predictable and manageable, even if interest rates surprise to the upside. And on that positive note, I'd like to turn the call over to John. John?

Thanks, Ray. I'm going to focus my comments on two important topics. First, our setup for 2023 and what we're seeing in the market. And second, the EBITDA bridge we laid out in our investor presentation, where we are, where we're going, and how we're going to get there. It is far easier to predict long-term value creation than it is to forecast short-term performance. especially in highly uncertain times like today. As Ray indicated, we've not yet seen any material impact from the macroeconomic slowdown that is either occurring or that many are forecasting. Group, business transit, and international inbound travel all continue to recover, and leisure travel remains very healthy. But we're not so naive to think that we won't see an impact or that we're suddenly no longer a cyclical industry. And we are humble and recognize we've never been through a pandemic and recovery before, let alone one where the Fed is working overtime to slow down the economy in order to bring inflation down to its target. So it's extremely difficult to forecast how these conflicting waves will impact each other as we move forward in 2023. All we can do is plan for different scenarios and monitor all of the macro and micro indicators very closely, and we'll let you know when we see the trends changing. In the meantime, we expect our first quarter to significantly improve over an Omicron-impacted Q1 2022. As Ray said, we saw healthy year-over-year rev par and total revenue growth in January, though it was negatively impacted by unusual weather on both coasts early in the year. February continues to see improvement over 2022, though we had a nice benefit from the Super Bowl in Los Angeles last year. As LA is one of our largest markets, it does represent a year-over-year headwind for the month. Yet we're seeing significant continuing improvement in LA, which is definitely mitigating a significant portion of that great four-day period. Group pace is looking good for 2023. As of the beginning of February, Q1 group room-night pace was ahead of last year by 54 percent, with ADR pacing 5.6 percent up to last year for a total group revenue improvement of 62.7 percent. Transgen is also pacing ahead of last year's first quarter by 16.2 percent in transient room nights, while rate is up by 1.4 percent. Total group and transient pays for Q1 was ahead by 27.5 percent in room nights, 2.1 percent in ADR, and 30.2 percent in total revenues. While Q1 is an easy comparison, we're currently pacing ahead year over year in group and transient in every quarter. This is partly a reflection of the ongoing recovery in demand and partly due to greater confidence on the part of group and transient customers booking further out than they did last year. For 2023, our group revenues are pacing ahead by 29.1%, with rate up by 7.2%. Total room revenue on the books for 2023 was stronger by 21.3%, with ADR ahead by 4.4%. Our urban ADRs are driving our rate advantage while our resort rates are up marginally, driven by group rates that are substantially higher while our transient rates are slightly down. We expect this will likely be the case for the year. As we look at our bridge to the short to intermediate term EBITDA upside in our portfolio, We expect our urban properties will recover to their 2019 EBITDA in total over the next couple of years, led by earlier to recover markets like San Diego, Boston, and Los Angeles, followed by current recovering markets like San Francisco, Washington, D.C., Chicago, Portland, and Seattle. In 2022, our resorts achieved an EBITDA level greater than the high end of our $55 to $60 million range of improvement over 2019 EBITDA that we have been forecasting. This assumes we utilize La Playa's actual results for the first three quarters of last year and their forecast at the time the hurricane hit for the fourth quarter of last year. We expect the resorts are likely to generate total EBITDA that is roughly flat in 2023 versus 2022. Again, ignoring the impact from La Playa being closed. So our resorts are already ahead of the bridge to a more normalized level of EBITDA upside that we provided in our investor presentation. In addition, we've already achieved the cost reductions in our property operating models detailed in the same EBITDA bridge presentation. though from a margin perspective, we wouldn't expect higher margins until we regain a significant portion of last year's almost 19-point occupancy deficit, and as total revenues continue to recover along with that demand. And there are still more operational efficiencies available in our portfolio, and the continuing efforts of Curator to bring down costs based on the growing scale of Curator and the increasing use of technology will offer further benefits in 2023 and beyond. That brings us to the last portion of our upside opportunity detailed in our EBITDA bridge. That's the upside from our multi-year extensive property redevelopment and transformation program emanating from the LaSalle assets we acquired in late 2018 and the resorts we acquired in the last two years. We historically have had great success redeveloping, repositioning, and re-merchandising properties to a higher level that we believe has significantly more potential than their prior positioning. While these projects tend to take anywhere from one to three years for planning and construction, and then three to four years to ramp up RevPar share gains and substantially higher EBITDA, they have pretty consistently delivered high single-digit to low double-digit unlevered cash on cash returns on our investments upon stabilization. Since the LaSalle acquisition back in late 2018, when LaSalle had completed three redevelopments, we have redeveloped and repositioned 13 of the acquired properties, including Mission Bay Resort in San Diego, which was a former Hilton, Lobert's Del Mar, Viceroy Santa Monica, Le Parc, Montrose, the Chamberlain, and Grantham on Sunset to Hotel Ziggy, all four of which are in West Hollywood. Chaminade Resort in Santa Cruz, Hotel Vitale in San Francisco, which is now One Hotel San Francisco, both Southernmost Resort and Marker Harborside in Key West and Mason and Rook and the Donovan, which are now Viceroy D.C. and Hotel Zena, both in Washington, D.C. In addition to these recently completed projects, we're in the process of a dramatic reimagining of Hilton Gaslamp in San Diego as a lifestyle hotel, and then a block away, we're in the process of a major redevelopment of Solomar, which is being transformed into a Margaritaville. During the same timeframe from 2018 to today, we also fully renovated, redeveloped, or transformed eight of Pebble Brook's properties, including Westin Gaslamp and Embassy Suites San Diego Bay downtown, Mondrian Los Angeles, the Hotel Zags in Portland, Hotel Zealous San Francisco, Scamania Lodge in the Pacific Northwest, W Boston, and La Playa Beach Resort in Naples. Of course, we also renovated or redeveloped most of our previous acquisitions, but we generally did so one or two years following their acquisition, just as we're doing now with the redevelopment and transformations of Jekyll Island Club Resort in the Golden Isles of Georgia, Estancia La Jolla Hotel and Spa, and Newport Harbor Island Resort, the former Gurney's Resort in Newport, Rhode Island. The total investment in all of these projects, both completed since 2018 and currently underway, is over $520 million. And most of these properties have yet to ramp to their full stabilized potential. As detailed in our EBITDA bridge, We expect these projects to deliver $27 million of additional EBITDA over the next three to four years. And as evidence of the confidence that we have in delivering this additional EBITDA, we have a sharp focus on how our customers are responding to our new products. Since 2019, our portfolio taken as a whole has climbed from an average customer popularity ranking of 45 on TripAdvisor to an average ranking of 33 at the end of 22, a 26% plus improvement that historically correlates with an ability to gain share through both rate and occupancy. So it seems pretty clear to us that our investments have dramatically improved the overall quality of our portfolio, that our service levels have also improved, and that this substantial improvement will lead to significant REVPAR share gains and EBITDA gains. And we expect performance over time to prove the value of this large investment program. As it relates to this year's projects, the $25 million complete upgrading and reimagining of the 286-room Hilton Gaslamp Quarter as a lifestyle hotel has been underway since November of last year and is due to be complete in the second quarter. The $27 million redevelopment of the Solimar as a Margaritaville Hotel in downtown San Diego began in January and should be complete early in the third quarter. The $20 million-plus repositioning of Jekyll Island Club Resort began early this year and should be complete late in the second quarter. The first phase of the repositioning of Estancia commenced earlier this month and is due to be complete late in the second quarter, with the final phase starting late this year and finishing in the spring of next year. The rooms renovation at Viceroy Santa Monica started in November last year and should be complete later this quarter. This will complete the two-phase $19.5 million repositioning of this iconic luxury lifestyle hotel on Ocean Boulevard in Santa Monica. At Skamania, we just completed the addition of three more treehouses, bringing the number of luxury treehouses to nine. And later this year, we'll complete five luxury glamping units, the first of their kind at Skamania, along with a three-bedroom villa and two two-bedroom cabins and our second large outdoor pavilion. As we test these new alternative lodging experiences out with our guests, the results will help guide the programming for the remaining 100 acres where we believe we can add up to another 200 lodging units. And this summer at Southernmost Resort, we'll undertake a complete $220,000 per key redevelopment and upgrading of the four guest houses totaling 50 rooms. Recall that two of these guest houses were purchased in late 2021 and immediately integrated into the resort as unique and distinct products. Finally, we commenced the first phase of the redevelopment and repositioning of Newport Harbor Island Resort in December last year, and we'll commence the second phase later this year in November with the completed product delivered in Q2 of next year. The total project is currently estimated as a $45 million investment. The first phase is focused primarily on deferred capital maintenance, and the second phase represents all of the improvements that we will reposition this property as a luxury resort. Taking together this long list of major repositioning investments, along with a very substantial transformation of our portfolio, from a heavily weighted urban coastal portfolio to a more balanced business and leisure segmented urban and resort portfolio, positions us very well for significant growth in REVPAR's share and EBITDA over the next three to five years, regardless of the macro environment. And by the end of the first half of next year, with the exception of Paradise Point, we will have completed the investment portion of the strategic redevelopment program opportunity that emanated from both the LaSalle acquisition and the resort purchases we made in the last two years. with only the significant upside to achieve and enjoy over the next few years. I'd also like to make one final announcement on behalf of myself and our board. It is my great pleasure to inform you that Ray Martz, our chief financial officer, and Tom Fisher, our chief investment officer, have both been promoted to co-presidents of Pebble Brook. Frankly, the new title merely reflects the much greater leadership responsibilities these two have undertaken on over the last few years. And as my longstanding leadership partners, I want to congratulate them on this long overdue recognition of their superior efforts and value to our company. So with that good news, that completes our prepared remarks. We'd now like to move to the question and answer portion of our call. So operator, Donna, you may now proceed with the Q&A.