Pebblebrook Hotel

Holbrook Hotel Trust First Quarter 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, Co-President and Chief Financial Officer. Thank you. Please go ahead.

Thank you, Donna, and good morning, everyone. Welcome to our first quarter 2023 earnings call and webcast. Joining me today is John Bortz, our chairman and chief executive officer, and Tom Fisher, our chief investment officer and co-president. But before we start, a reminder that many of our comments today are considered forward-looking statements under federal securities laws. These statements are subject to numerous risk and uncertainties as described in our SEC filings, and future results could differ materially from those implied by our comments today. Forward-looking statements that we make today are effective only today, April 27, 2023, and we undertake no duty to update them later. We'll discuss non-GAAP financial measures on today's call, and we provide reconciliations of these non-GAAP financial measures on our website at pebblebrookhotels.com. Our financial results exceeded our outlook for the first quarter. Adjusted EBITDA finished at $60.8 million, increasing 30.9% from a year ago. Adjusted FFO was at 22.4 million, with adjusted FFO per share of 18 cents, a 67.3% improvement, and represented very significant progress from a year ago and a great start to the year, especially in many of our urban markets. We're pleased with our financial results, despite cancellations and disruption from numerous winter storms, excessive rain, from rivers and flooding that negatively impacted demand at many of our hotels and resorts during the quarter and knocked out approximately 80 guest rooms in Los Angeles, with most of them not due back into service until mid to late May. Our year-over-year revenue EBITDA and FFO would have been higher if not for the remediation and restoration of La Playa from Hurricane Ian and the disruption caused by the five significant redevelopments and repositionings taking place in the quarter. These two issues negatively impacted adjusted EBITDA and FFO by approximately $11 million, or about $0.09 per share. On the revenue side, same-property REPAR increased 18.5%, and non-room revenue increased 34.4%, exceeding the top end of our outlook, highlighting the robust out-of-room spend we continue to experience. Total REPAR increased 23.7% at the high end of our Q1 outlook. The market's showing the most robust year-over-year growth in San Francisco, Washington, D.C., Portland, Seattle, and Chicago. Our San Francisco hotel has generated a 117.5% increase, same property rep part, driven by occupancy rising to 46% versus 26% the prior year. Our San Francisco hotel has generated 3.5 million of EBITDA versus negative 2.4 million of EBITDA in Q1-22. an outstanding $6 million improvement from last year. San Francisco benefited from several citywide groups that performed well, including JP Morgan Healthcare in January and Game Developers Conference in March, as well as improved corporate transient and leisure demand in the city. Obviously, despite this significant improvement, San Francisco still has a long way to reach full recovery. A Washington, D.C. hotel has also exhibited strong improvement during the quarter over the prior year, from same property rep are 126.6% as occupancy increased 53% up from 27% the previous year. And ADR rose to 13%. DC benefited from increased business group, transient, convention demand, as well as slowly improving international demand. The administration's recent announcement encouraging federal workers to return to the office if successful would further bolster hotel and restaurant demand in the market. D.C. is shaping up to have a solid second quarter. Our two Key West resorts continue to perform well, but had difficult year-over-year comparisons due to the robust quarter last year, when Florida was one of the few states fully open for business during the Omicron surge. Fortunately, the Florida year-over-year challenges were primarily focused on Key West and, to a lesser extent, Naples, which was probably still impacted by a negative perception of the market following Hurricane Ian. Margaritaville increased Repar by 5%, growing occupancy 4%, with ADR up 1%, and food and beverage revenues climbing by 14% as group recovered and transit demand remained healthy. Margaritaville continues to outperform its Fort Lauderdale competitors and our expectations. Key West was our weakest market from a quarterly growth perspective. Repar declined 16.6%, primarily due to ADR being down 15.5%, and occupancy down 130 basis points. We expected a pullback in Key West, yet ADR still up more than 37% versus the comparable period in 2019, with RepR up 22.1%. We expect that overall demand in these markets will return to 2019 levels, with ADR premiums remaining very significant through pre-pandemic pricing levels. Also, as we detailed in the last night's earnings release, we have made substantial progress in repairing, restoring, and reopening La Playa. We were able to open the Bay Tower rooms in Q1. The Gulf Tower partially opened in April, so the overall resort is operating with limited services and amenities. But this is positive progress. Other hotels and many high-rise apartment and condo buildings along the beach remain completely shuttered. In March, we ran 19% occupancy, and in April, we expect to achieve 24-25% occupancy as public areas and services return We expect this to improve throughout the year. We're currently forecasting the beach house to be restored and reopened by the end of the year. Rebuilding inside of that beach house, which is in progress, is quite the process, as we and our board saw last week when we toured following our board meeting at La Playa. Our insurance carriers have approved approximately $8.1 million in business interruption income during the first quarter, slightly more than we assumed in our outlook. This is an initial preliminary amount related to lost business from the fourth quarter of 2022, and it does not represent the full amount of BI we expect to receive for Q4 of last year. Our Q2 outlook assumes we will receive approval from our insurance carriers for an additional 10 million of BI, which will be the initial preliminary amount for lost business from the first quarter of this year, historically the seasonally strongest quarter for La Playa. Before the hurricane, we expect to apply to generate approximately $14 million of EBITDA for Q1-23. Our BI has been reflected in adjusted EBITDA and FFO, but not hotel EBITDA, which should be noted by our investors and analysts in their respective models. To date, we've received approximately $35 million from our insurance providers to complete the necessary remediation, repair, and BI work. As we look to the second quarter, we haven't experienced any noticeable increase in cancellations or attrition related to concerns with a macroeconomic environment. Generally speaking, the cancellations and negative surprises we've experienced so far in 2023 have been weather related, not economic. April same property rough bars expected to be flat down versus the prior year period, negatively impacted by the five redevelopments and repositionings was out of order, rooms peaking in April, and the storm-related rooms out of service in West Los Angeles as well. Our Q2 outlook assumed same-property rough bar increases 1% to 4%, and this outlook incorporates the disruption from these ongoing redevelopments, which we estimate will negatively impact Q2 same-property rough bar by approximately 150 basis points, total revenues by approximately $7.5 million, and adjusted EBITDA by approximately $5.5 million. Our portfolio continues to narrow the gap to 2019 same-property revenues and EBITDA. After adjusting out the impact of the pie and our renovations, same-property EBITDA versus 2019 has improved from down 21% in the fourth quarter of 2022 to down 8.3% in Q1, and based on the midpoint of our Q2 outlook, down just 8.8%. We have some one-time expenses related to the cleanup and remediation of our hotels in LA that were affected by the storms in Q1, plus increased energy and property insurance costs, which unfortunately are likely to persist for the balance of the year. But revenues continue to improve, as well as our property EBITDA, despite some of these operational challenges. Shifting to our capital improvement plan, we completed approximately $26 million of investments during the quarter. The majority of these dollars represent investments in five significant redevelopments and repositioning, which John will discuss later. We continue to target investing $145 to $155 million into the portfolio during 2023. On the investment side, we were very active. We sold three properties in the quarter, one in Portland, a retail parcel on Michigan Avenue in Chicago, and a hotel in Coral Gables, generating $135.3 million of proceeds. As we highlighted in last night's earnings release, we also executed contracts to sell to Monaco Seattle for $63.3 million and to Vincent Seattle for $33.7 million separate third parties. We expect both sales to be completed later in the second quarter, subject to normal closing conditions. The net proceeds from our asset sales are being held as cash and are being used to reduce our net debt and for prior and potential additional share repurchases. Since we reported in late February, we repurchased an additional 3 million common shares, comprising $42 million of capital, at an average share price of $13.96. Since October of last year, when we commenced repurchases, we have utilized $124.6 million of capital to repurchase 8.5 million common shares, or over 6% of the then-existing common shares outstanding, at an average share price of $14.64. representing a more than 50% discount than the midpoint of our NAV range. These common share repurchases have increased our NAV by roughly $1 per share. As we sell additional properties, we will evaluate how to best utilize these proceeds, including reducing debt and our additional common and preferred share repurchases, depending on our outlook on the economy and how our performance progresses. If we use some portion of future proceeds to repurchase our securities, we will do so only while reducing our net debt on a no worse than a leverage neutral basis. And on that positive note, I'd like to turn the call over to John. John?

Thanks, Ray. I'd like to provide some color on the demand trends we've been seeing, where our growth is coming from, our booking trends and pace for Q2 and the rest of this year, and I'll discuss the cost pressures we're experiencing. First, the demand trends. It's been just two months since we last reported our year-end earnings and trends, and we provided a mid-quarter update last month with performance through February, and March hasn't been any different. We haven't seen any changes in overall demand trends in our industry in the last 60 days. Business travel continues to recover, both group and transient. Demand related to conventions is getting back to normal. International inbound travel continues to improve. with Europe closing in on pre-pandemic levels and Asia at the early stages of its recovery with a long way to go. Leisure travel remains healthy, though with less exuberance than last year when splurging on suites and upgrades was higher than historical norms. With the continuing recovery in business travel, our urban properties have benefited the most. Our urban market occupancy climbed over 10 points or 22.1% versus an Omicron-impacted first quarter last year, and ADR increased a strong 8.7%, bringing same-property REF PAR for our urban hotels to an increase of 32.8%. Non-room revenue growth was even higher at 53.1%, with increased prices and group demand that comes with more non-room spend driving this higher level of growth. Yet with leisure and international in the early stages of recovery in the cities and business travel with a ways to go, we have significant occupancy and total revenue opportunities as our urban market occupancy was still over 19 occupancy points or 25% below the 2019 level. Some of this will be recovered after the three urban redevelopments are completed later in the second quarter. but most of it will be recovered as business, leisure, and international travel normalize at higher levels. The cities that led the first quarter recovery, as Ray indicated, included San Francisco, Washington DC, Chicago, Portland, and Seattle. We saw continuing improvement in San Diego, Boston, and Los Angeles. Our West LA properties were up against a tough comp in Q1 with Super Bowl in February last year. And LA also experienced uniquely heavy and continuous rains throughout the quarter, which negatively impacted leisure travel. Yet we still grew RevPar by 14.9% due to the continuing recovery in business travel, particularly entertainment that helped drive a 15 point or 28% increase in occupancy in the quarter. yet we're still 10 points or 12.5% below 2019 occupancy. In San Diego, the first quarter was very strong in the market, benefiting from a robust convention calendar, though it too was negatively impacted by the never-ending heavy rains. We had two of our four downtown properties under redevelopment, Hilton Gaslamp and Solimar. As a result of this disruption, The Hilton lost almost 9 points of occupancy, or 17%, while Solomar lost 7.8 points of occupancy, or 14%. Comparatively, and as indicative of the market strength, our West End Gas Lamp grew occupancy by 12 points, or 17%, and our Embassy Suites grew occupancy by 19.6 points, or 33%. The West End's occupancy climbed all the way back to 2019's level due to its higher group segmentation, with overall ADR 22% higher than 2019, and the Embassy is still 9.5 points, or 11% below 2019's occupancy, but with a rate 10% higher. San Diego is our best performing urban market. and it has an even better convention calendar next year. Our resorts performed well in the quarter, despite the year-over-year softness in rate in Key West and the continuous heavy rains that negatively impacted all six of our West Coast resorts. On a same property basis, which excludes La Playa, our resorts gained 6.6 points of occupancy, or 12.1% growth, while ADR declined by 11.7%, resulting in RevPAR down 1.1% year over year. As expected, the occupancy gains were driven by the recovery in group demand and some lower-rated transient segments. The ADR decline resulted from the decline in Key West and the return of demand from some lower-rated channels, while group rate throughout increased at a healthy rate. Our Q1 2023 same property ADR for our resorts remained at $126 premium, or 44% higher than Q1 2019. Our non-room revenue at our resorts also grew substantially in the quarter, up 19.2%. This was primarily a result of price increases we've taken and the recovery of group that drive substantially higher non-room revenue spend versus transient. Turning to our pace for Q2 and the rest of the year, it looks pretty good. In Q2, on a year-over-year basis, group room nights on the books at the end of March were up 5.7 percent, group rate was up 6.1 percent, and group revenues were up 12.1 percent. The total revenue pace for Q2 versus last year, including group and transient, was up 4.9%, with rate representing 2.1% growth. For the entire rest of the year, including Q2 through Q4, group room night pace is ahead of last year by a strong 10.3%. Group ADR is up by 8.7%. and group revenue pace is ahead by 20%. Factoring in group and transient and looking at the total pace for the remainder of the year, total room nights are up by 8%, ADR is ahead by 3.9%, and total revenues are up by 12.2%. Q2 year-over-year total room revenue pace is the weakest of the year. It improves in Q3 and then further in Q4. This is encouraging considering the current concerns about an economic slowdown or recession later this year, which we certainly do not yet see in our pace for the rest of the year. However, we should all remember that in the hotel business, it's good until it's not, meaning it can turn very quickly and business on the books can cancel as well. Outside of the positive demand trends, we're experiencing a challenging cost environment. While we believe the rate of growth in wages and benefits is normalizing this year, and generally following inflation, we've significantly restaffed our property teams over the last six months. And so total staffing costs versus last year have been and will remain a challenge through September. In addition, As food and beverage and other services volumes like spa services recover, significant marginal expenses also recover. At this time, we're also experiencing significant increases in costs related to energy, water, and property insurance. Despite these expense pressures, we believe that after we lap last year's restaffing success later this year, will have significant operating leverage in the business to drive higher margins and higher EBITDA. In addition, and also on the positive side, we had further success in one of our markets, significantly reducing some prior year property assessments. As a result, we achieved a significant property tax reduction that was trued up in Q1. We expect to have further success in this market and other markets on prior year assessments in the coming years. These reductions and true-ups in likely over-accrued property taxes will help reduce cost increases related to some of these other expense categories. In the transaction market, as Ray indicated, we've had great success selling numerous properties over the last 18 months. We have two additional properties, both in Seattle under contract with buyers who have completed due diligence and have hard money deposits at risk. Assuming these two property sales close, sales to date will total over $230 million. Of course, sales are not done until they're done, regardless of the contracts. High quality and well-located properties like we own continue to be highly desirable to the buying community, and as a result, were bringing additional properties to market. While the transaction market for hotels, and frankly most property types, continues to be challenging because of the debt markets, and they've probably been made more difficult because of the recent events surrounding several smaller regional banks, we'll continue to work smartly by seeking out buyers who can overcome these debt market challenges. Finally, I wanted to update you on this year's major redevelopment and repositioning projects. We completed the first phase, sorry, the final phase of the redevelopment of Viceroy Santa Monica earlier this month. Following the renovation of the public areas two years ago, we now have a lifestyle property at the luxury level in Santa Monica that is highly attractive to both business and leisure travelers. We believe we're now in a great position to drive a $30 to $50 higher rate in a market that is seeing some shrinking supply and improving demand. By the end of next month, we expect to be substantially complete with the renovation and transformation of our Hilton Gaslamp Hotel in San Diego into a higher-end lifestyle hotel with a dramatically improved and larger indoor-outdoor bar-restaurant expanded and improved event venues, and a whole new vibe. This property probably has the best location in downtown San Diego, and it benefits from being the closest hotel to the entrance to the Convention Center, as well as the main entrance to the Gaslamp District. This repositioning, coupled with the property's premier location, should allow us to drive $25 to $35 of higher ADR and substantially higher non-room avenues and achieve a 10% or better annual cash return on our investment. In July, we expect to complete the redevelopment and transition of Hotel Solimar into the Margaritaville Hotel Gaslamp District just two blocks from our Hilton. We're incredibly excited about this project and we expect to drive significantly higher rates, and dramatically higher food, beverage, and non-room revenues at this property as a Margaritaville. Between the rate share gains and increased total revenues, we expect to deliver a stabilized annual return substantially above our typical 10% cash yield on investment. At Estancia La Jolla, a resort we acquired in late 2021, we expect to complete in June the first phase of our two-phase repositioning of this property as a luxury resort that will be more appealing to both leisure travelers as well as its already heavy social and business group and corporate transient customers from the surrounding La Jolla area, including its large and growing Life Sciences Hub. This phase involves a complete renovation of the guest rooms, including bathrooms, and an expansion and upgrading of the many outdoor event venues at this expansive resort. We'll commence the second phase of this redevelopment and repositioning starting late this year. This second phase includes the renovation of the main ballroom, meeting space, restaurants, lobby, and coffee shop, and it involves expanding and upgrading the entire pool complex, including adding high-end cabanas, a new pool bar, and creating a new event venue as part of the pool complex. Finally, we're in the process of completing a major upgrading of Jekyll Island Club Resort, which includes a comprehensive guest room renovation of all of the historic buildings, including the main building and the three large cottages. It also includes complete public area and meeting space renovations and upgrades, expansion of both pool complexes, including the addition of high-end cabanas for rent, relocating and expanding the property's retail store, and upgrades to the property's numerous outdoor venues. We believe repositioning this grand and unique historic resort as a luxury regional resort will deliver upon stabilization a very attractive double-digit cash yield on our total investment. In addition to these current projects, we expect to commence the complete redevelopment and upgrading of Newport Harbor Island Resort late this year. This represents the last major redevelopment project in our strategic plan involving the LaSalle portfolio and the properties we purchased in the last two years. In addition, as you know, we've completed over 24 major repositioning and redevelopment projects throughout our portfolio during the last several years. These projects are gaining share as the demand returns, and we expect to achieve very attractive cash yields at these properties upon stabilization. Significant progress has already been made at Chaminade Resort, Mission Bay Resort, Westin Gas Lamp, Embassy Suites San Diego Downtown, Skamania Lodge, One Hotel San Francisco, W Boston, The Marker Key West, and Lobert's Del Mar. All of these projects also involve creating and expanding indoor and outdoor event spaces, reconcepting and upgrading restaurant and bar outlets, and generally merchandising all indoor and outdoor spaces to drive significantly greater out-of-room revenues and EBITDA. We're confident that with the dramatic reshaping of our portfolio during the last several years through dispositions and acquisitions, combined with these many major projects, we're now in a great position to organically grow our top line and bottom line beyond the industry's growth in the years ahead as we achieve the payoff of the very significant dollar investment and hard work that's gone into the dramatic improvement and repositioning of the properties we acquired in the LaSalle transaction and those resort properties we acquired in the last two years. That completes our prepared remarks. We'd now be happy to take your questions. Donna, you may proceed with the Q&A.