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spk01: Greetings and welcome to the Pebble Brook Hotel Trust Second Quarter Earnings Conference Call. At this time, all participants are on a listen-only mode. A 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. You may begin.
spk06: Thanks, Donna. And good morning, everyone. Welcome to our second quarter 2023 earnings call and webcast. Joining me today is John Bortz, our chairman and chief executive officer, and Tom Fisher, our co-president and chief investment officer. And for those of you who track these sort of things, this is John's 100th earnings call. So congrats, John.
spk02: That's right.
spk06: Wow. So before we start, a reminder that comments today are effective for only today, July 28, 2023. Our comments may include forward-looking statements under federal securities laws. Actual results could differ materially from our comments. Please refer to our latest SEC filings for a detailed discussion of potential risk factors and our website for reconciliations of the non-GAAP financial managers referred to during our call. We are pleased to report that our adjusted EBITDA and adjusted FFO both exceeded the top end of our outlook. Operating expense reductions helped to offset lower-than-expected repar growth, while greater-than-expected business interruption proceeds and interest and tax savings provided a further boost to our bottom-line financial results. We continue to see a gradual recovery in business travel as both improving group and transit demand benefited our urban properties. The recovery in San Francisco led the way, with occupancy climbing by over 13 points, followed by Washington, D.C., up 11 points, Los Angeles increasing over 9 points, Chicago up 6 points, and Portland increasing almost three points. Our urban properties also benefited from recovering leisure travel to the cities, with concerts, sporting events, and festivals generating demand loss during the pandemic. A big thank you to Taylor Swift, and we love her, Dead & Company, and Morgan Whelan. And please keep scheduling those big concerts. Recovering business and leisure travel combined drove our same property urban and rent part growth ahead by 5% over last year's second quarter. This helped to offset the moderating room rates and normalizing demand for suite and premium room upgrades we're experiencing from the leisure segment, particularly at our resorts. St. Proffitt's total rep part posted a slight increase of 0.6%. Room revenue growth was flat, with non-room spending up 2.1%. During the quarter, we experienced some unexpected challenges, such as unseasonably cold and wet weather on the West Coast, notably in South California and the Pacific Northwest, which negatively impacted leisure demand. as well as slightly more significant than anticipated disruption from our redevelopment and a negative impact to our West Los Angeles properties due to the rudder strike that significantly reduced demand that emanates from the TV and film industries. Nevertheless, occupancy in our portfolio continued to recover as we regained over 300 basis points, or a 4.6% improvement in occupancy. And despite an industry-wide softening in leisure demand, We also generated a promising rise in our Q2 weekend occupancy to 79%, a marked improvement from the 75.7% from the prior year. This encouraging trend of improving weekend demand was evident throughout our portfolio, including our resort and urban locations. Our hotels gained market share during the quarter, and our TripAdvisor customer rankings are at the highest ever across our portfolio, indicating the desirable nature of our properties, and the quality of the service provided by our various operators. These achievements are a testament to the success of our recent property redevelopments, which have made our hotels more attractive to both the leisure and business travelers. Disruptions from the five significant active redevelopment projects during the quarter decreased REF PAR by approximately 180 basis points, about 30 basis points more than we originally anticipated. Various issues, including delays in receiving and installing FF&E, caused these disruptions, and primarily impacted Hilton San Diego Gas Line Quarter and Hotel Solomar. All the projects, except for Hotel Solomar's conversion to Margaritaville Hotel San Diego Gas Line Quarter, have been successfully completed. We anticipate Solomar's transformation to be substantially complete by the middle of August, a slight delay from our original target. Despite these challenges, our same property EBITDA of $110.7 million was in line with our Q2 outlook range. This was achieved through focused efforts to moderate operating expense increases and some continuing success in reducing property taxes. Furthermore, our energy cost increases were more moderate than in previous quarters, registering an 8.8% increase in Q2 versus the prior year and a decline from the 18.3% increase experienced in Q1. This reflects significant investments and efforts to reduce energy and water usage throughout our portfolio. On the property insurance side, we completed our annual renewal in June. Despite the very difficult market conditions, we were able to limit our property and casualty premium increase to 59%. We view this as a positive outcome given the current challenging nature of the property insurance markets, the fact that we largely maintained our prior coverage levels and terms, and the fact that there are many others out there who have experienced 100% increases or more. Turning to monthly rep art growth, April was flat, May rose by 1% and June ended down 1% compared to the same months in 2022. Our adjusted EBITDA and FFL benefited from business interruption proceeds of $14 million for La Playa, exceeding our forecast of $10 million. Lower than expected, G&A and interest expenses also contributed to our positive variances to our outlook. During Q2, we completed $52.5 million in capital reinvestments across the portfolio, mainly concentrated in our $5.5 major property redevelopments, and to date we've invested over $75 million into the portfolio. The major disruptions from these redevelopments are largely behind us as we enter the second half of 2023. We are confident our repositioned properties will significantly increase our market share and cash flow in the upcoming months and years. To detail the operating performance impacts from our five major redevelopments to better isolate the performance of the non-impacted properties, If we look at the portfolio numbers excluding these five properties, which is Asante, La Jolla, Solomar, Hilton Gaslamp, Viceroy Santa Monica, and Jekyll Island, RepR growth for Q2 would have shown an increase of 1.8% versus the flat RepR we reported. Total revenue would have shown an increase of 2.8% versus the 0.7% we reported, and hotel EBITDA would have been down by 8.7% from last year's versus 12.9% of reported, or over $6.5 million of impact to EBITDA in the second quarter, and over $11 million a year to date. We also made substantial progress in the ongoing repair, restoration, and reopening of the Playa Beach Resort and Club in Naples. The 40-room Bay Tower and 70-room Gulf Tower, which houses the resort's lobby, restaurant, and club, are now largely operational, with additional resort amenities being added each month. The 79-room beach house is also progressing, and we expect the restoration of this building to be substantially complete and reopened by the end of the year. During Q2, despite not offering complete resort experience, plus the noise and disruption of ongoing construction, the 110 guest rooms available for sale at the two operational towers managed to sustain a 46% occupancy with a $452 average daily rate, and encouraging 19% increase of the average rate over It's worth mentioning before the devastation caused by Hurricane Ian, we projected to apply it to generate more than $10 million of EBITDA for Q2 versus the $1.9 million loss that it incurred. Our Q3 outlook factors in an additional $10.5 million of BI insurance proceeds related to a portion of Q2's losses, and to date we've recorded $22.1 million of business interruption through this year's second quarter. As part of our strategic capital reallocation efforts, we completed $97 million of property sales in the quarter, including Hotel Monaco Seattle and Hotel Vintage Seattle, bringing our total asset sales to $232.3 million since the start of the year. All the sales have been urban properties, as we have sought to better balance the leisure and business demand segments of our portfolio to maximize our risk-adjusted returns. During the second quarter, we strategically utilized $50 million of the sales proceeds to repurchase our common shares at an average purchase price of $13.97 per share, bringing our common share purchases to $91 million since the beginning of the year. Adding in our purchases from the fourth quarter of 2022, when our efforts began, we have purchased 160.5 million of common shares, or 8% of the shares outstanding at that time, at a weighted average share price of $14.51 per share. We have purchased $16 million of our preferred equity at a $16 per share amount, a significant 36% discount to its par value of $25. And we estimate that our share repurchases have contributed over $2 per share in additional net asset value. This is based on our updated NAV table, which is available on our website. Turning to our balance sheet and liquidity, we have over $823 million in liquidity, far more than we had before the pandemic, comprised of $186 million in cash and $637 million available on our credit facility. Our weighted average cost of debt stands at 4.3%, with 78% at fixed interest rates, and 91% of our debt is unsecured. Our growing cash balance, the result of our successful property sales, combined with our existing liquidity, will be available, if needed, to address our upcoming debt maturities over the next 12 to 18 months. And with that update, I'd like to turn the call over to John. John?
spk02: Thanks, Ray. I thought I'd share some color about what we've been seeing in the industry and within our portfolio. In the second quarter, total industry demand for hotel rooms clearly flattened out, with weekdays as a good indicator of business travels recovery continuing to improve, albeit at a more gradual pace, while the industry's weekend demand for rooms was down year over year in every month in the quarter, continuing a trend that began in March. We believe these slowing demand trends do not indicate an impact from macroeconomic issues or concerns, but rather primarily reflect two major factors. First, we believe leisure travelers are now much more comfortable than last year with traveling abroad, especially to Europe. as well as cruising again, with cruise ships reportedly sailing at full capacity. We believe this represents the same sort of revenge travel that benefited the domestic hotel business last year. Second, we believe that the comparisons to last year's second quarter were more difficult because we're comparing to numbers that significantly benefited from Omicron-related rebookings from the first quarter thereby somewhat overstating the true underlying demand recovery in the second quarter of last year. While the revenge travel factor for outbound international travel and cruising will likely continue to impact this year's demand levels, we believe it's more likely to normalize late this year and next year. As it relates to the difficult comparison to last year's Omicron-induced additional demand, we believe we're now mostly past that impact. We believe an easier comparison may already be beginning to show up in July with the most recent numbers STR reported showing occupancy for the industry ahead of last July month to date. If that trend holds for the entire month, it would be improved from last quarter when occupancy was down year over year in every month. Fortunately, Supply is expected to continue to be benign, creating a strong positive tailwind for the industry for the rest of this year and for many years to come. In the second quarter, industry supply growth was just 0.3 percent, and we don't expect it to materially increase for quite some time. In fact, we don't see industry supply growth returning to even the 1 percent level until 2027 or later given the challenges with the cost and availability of construction financing and the high cost of construction, particularly as compared to potential development yields and hotel values for existing properties. For Pebble Brook, business group continued to recover in the second quarter, with group room nights up 2.7%, ADR ahead by 4.7%, and total group revenue up 7.5%. so well ahead of last year's second quarter. Transient revenue year over year was down 2.3% while room nights still increased substantially with a lower average rate causing the decline in transient revenue. The ADR decline in transient rates occurred primarily at our resorts and was generally due to what we have called less splurge, which means fewer premium rooms such as suites and view rooms being sold and those rooms that are sold achieved lower rates overall compared to last year's prices, which benefited from very strong domestic demand and a relatively price-insensitive consumer. The decline in ADR at our resorts was also caused by group weekday occupancy gains at lower rates than transient, which is typical to our resorts, and some occupancy gains made through lower-rated channels, such as wholesale or international. Year to date, our resort rates have declined by 10.4%, or $45.30, yet they remain at a very robust 40.4% premium to the first half of 2019, or a premium of $111.89. So, doing the math, our resort ADR premium has regressed about 29% or so, but it's still slightly better than the one-third regression from peak rates we were expecting as demand normalized. We remain encouraged that our resort rates will ultimately grow from these much higher rates we've achieved in our resort portfolio since 2019. And some of this ADR and REVPAR gain is a direct result of competitive share gains due to the very significant strategic capital investments we've made over the last several years to reposition our resorts higher in their respective markets with more share gains to come. In fact, our total portfolio managed to gain REVPAR share in Q2, in this case 66 basis points, even with the approximate 180 basis point negative impact on our portfolio's REVPAR performance due to the five redevelopments in the quarter. As we look at the third quarter, we've not yet observed any meaningful increase in cancellations or attrition. This would be one of the first indicators of a slowdown in demand as a result of broader macroeconomic issues or concerns. And so far, so good. We're currently forecasting that occupancy for our portfolio in the third quarter will continue to increase over last year by as much as two to three occupancy points. but it's likely to do so at a similar decline in average rate as occurred in Q2 for all the reasons previously discussed. Total revenue pace for the third quarter is ahead of same time last year by 5.9%, with combined group and transient RIM nights ahead by 7.9%, and ADR off by 1.9%. We believe this revenue pace advantage is likely to shrink over the course of the quarter, as some transient and group have likely booked further out, potentially having less to book on a shorter-term basis. Our bookings in the quarter for the quarter in the second quarter were less than the prior year, though we're hoping some of this was due to the strong bookings out of Q1 into Q2 that took place last year as Omicron wound down in last year's first half. Fourth quarter pace on the books has been and continues to exhibit the strongest quarterly year-over-year growth. And should the economy continue to hold up, Q4 should be our strongest growth quarter of the year compared to last year outside of the first quarter with the easy Omicron comps last year. Currently for the fourth quarter, our total revenue pace is ahead of same time last year by 35%. with room nights ahead by over 25% and ADR up by almost 8%. Bolstering our optimism for the fourth quarter are very strong year-over-year convention calendars across a number of our cities, with standout pace growth in San Francisco, San Diego, Boston, and Washington, D.C. Our group revenue pace for Q4 is ahead of same time last year by over 42 percent. It's critical to remember, however, that these positive pace figures are indicators. They're not guarantees of realized business. Of course, it's better when they're up, and up by a lot is better than up by a little. In terms of July same-property REVPAR, we anticipate a slight dip of about 1 to 2 percent compared to the prior year, with all of it due to rate. as occupancy in July is on pace to be up by around four points versus last year. Recent booking activity in July, the peak summer travel month, has been encouraging, particularly for short-term leisure. Our Q3 outlook projects same property REVPAR compared with the prior year quarter to be in the range of minus 2% to up 1%, but it's still likely to be ahead of 2019. We expect gains in occupancy versus last year, slightly offset by declines in ADR. Our forecast incorporates the last of the disruption from the redevelopment of Solimar being converted into Margaritaville Hotel Gaslamp Quarter, San Diego, which is slated for substantial completion and re-flagging in mid-August. Additionally, we factored in our best estimates concerning the potential negative impact of the ongoing writers and actors strikes in Los Angeles, which we estimate to be as much as $1 million in revenues and $500,000 in EBITDA. Of course, we have no special insight into when these strikes might be resolved. Currently, we understand the two sides are not meeting. On the expense side, growth over last year should continue to come down in the second half, including in the third quarter. But the biggest year-over-year growth rate decline in expenses should come in the fourth quarter, as a lot of positions at our hotels were filled from September through year end, getting to more normalized levels that would be able to service the higher occupancies being achieved this year. As Ray indicated, we've made progress in our energy costs, and we continue to successfully reduce property tax assessments and property taxes. The challenge as it relates to property taxes is that the process for achieving reductions involves local and state governments. It can be a very long process, and sometimes litigation is required to achieve a fair assessment. As a result, the timing for settlements or results from litigation are unknown and very difficult to forecast. However, we believe that we'll continue to have further success over time in a number of our markets, particularly in our cities. This will reduce our real estate tax obligations and lower our costs in the future, including true-ups for prior years accrued and paid based on inflated values. The biggest headwind today in costs is coming as a result of increased premiums for our property and casualty insurance, with our new policy beginning June 1st this year and running through the end of May next year. The 59% increase in our premium that Ray mentioned represents a $9.3 million annual increase in our cost. Moving to our redevelopments, disruption for this year is mostly behind us. We expect about $1 million of EBITDA impact in Q3, with the majority coming from completing the conversion of Solimar to Margaritaville in downtown San Diego. We just toured the property last week, and it's looking fantastic, and we're very excited about a cutover to the Margaritaville brand that is currently slated for August 15. We also toured Hilton Gaslamp, which we visited at the beginning of Comic-Con, and the property was sold out, jammed with customer event activations, and had well-paying advertising wraps covering the exterior walls. The hotel now looks like a brand-new, high-end, lifestyle-focused Hilton. We should be able to gain significant share at both of these superbly located properties fairly quickly, given the overall strength of the downtown San Diego market. We also toured the Estancia La Jolla Resort and, in fact, had our board meeting there last week And it too has all new rooms and event lawns and is already having quick success recovering from its renovation and repositioning. The property team was proud to report that Occupancy is on track to hit the upper 80s this month and the resort should also achieve an all-time record in ADR and total revenues for July. Hats off to the Estancia team for doing such a great job ramping back up so quickly. Viceroy Santa Monica's $19.5 million two-phase redevelopment and Jekyll's approximate $21 million redevelopment were also substantially completed in the second quarter, and we're also very encouraged by the very positive customer reaction to both of these repositionings. With the completion of these projects, we're just about finished with the strategic redevelopment program within the portfolio that came out of the opportunistic acquisition of LaSalle and the several opportunistic resort acquisitions we've made in the last two years. We just have the redevelopment and repositioning of Newport Harbor Island Resort and the second and last phase of the Estancia La Jolla project remaining. Both are expected to commence midway through this year's fourth quarter and be complete in the first half of the second quarter of next year. The impact from these projects on operating performance should be small, with Estancia expected to have some minor impact due to the redevelopment of the lobby, coffee shop, pool, and main ballroom. And we expect no material impact from Newport Harbor, given the property typically has negative EBITDA every month from November through March, and we're likely to close the property during the redevelopment due to the scale and comprehensive nature of the project and the low demand levels during the redevelopment period. As a result, we'd expect our financial results to be clean of any material redevelopment disruption over the next couple of years, while at the same time we'd expect to be gaining share in our markets given the recent repositioning of so many of our properties and the very strong overall physical condition of our portfolio. will have the added benefit of customers comparing our high-quality properties, which are in excellent condition, with others in our markets that continue to be starved of capital due to years of a challenging operating environment and today's very difficult debt capital markets. While we currently operate in a fairly uncertain economic environment, particularly in the near future, our fundamentals are very strong. We effectively have a newly redeveloped, repositioned, and re-merchandised portfolio that should outperform its competition. We're in markets that still have significant upside recovering from the negative impact from the pandemic and will be in a highly supply-constrained environment for years to come. And we have a management team with tons of experience that is laser-focused on creating value for our shareholders through reallocating capital to the most attractive opportunities. Currently, creating shareholder value involves selling properties at today's market prices and using a significant portion of those proceeds to repurchase our common and preferred shares at very significant discounts to their current or par values, and then using the remaining portion to reduce our debt on a leverage neutral or better basis. With that, I'd now like to turn the call back to our operator so we can proceed with the question and answer portion of our call. Donna, you may proceed with the Q&A.
spk01: 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. 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 the handset before pressing the star keys. In the interest of time, we do ask that you please limit yourself to one question. Again, that is star one to register a question at this time. Today's first question is coming from Dori Keston of Wells Fargo. Please go ahead.
spk05: Thanks. Can you give us a sense of to what extent strong convention calendars for you have translated into outsized rate growth over time, just to give us, I don't know, some guide on how we should be thinking of Q4's potential?
spk02: Yeah, I mean, I don't know, I don't have any math for you at this point, but the two things I'd note is our convention rates in general tend to run higher than our average rates. And then when there's compression in the market, if it's a medium to large size compression depending, convention depending on the market, we tend to be able to drive, you know, significant additional premiums on our transient side as well over that period of time. You know, the numbers can run, at least for those days, often can run, you know, I'd say 30% to 50% higher than a more typical day and certainly a big convention. Depending upon how much of the group block we've taken versus filling with business outside of the group block, it could be as much as 50% to 100% premium on those days. So it should be a big factor. It should be a much better factor in Q4. And to the point of your question, I do think there'll be less pressure on average in the portfolio in the fourth quarter on rate because of the better convention calendar in the quarter.
spk05: Okay. What's a good run rate for a fully renovated portfolio?
spk02: Run rate in... In terms of capex, probably looking at something more like $50 to $60 million.
spk06: And Doria, our capex over the next couple of years should be a little bit lower than the typical run rate because, as John indicated, and we detailed in the press release, the amount of capital we've invested in the portfolio has been pretty significant. So the normal maintenance capex will be lower, at least over the near term.
spk05: And then just on the recent renovations, how should we think of the ramp up over the next few years from maybe an EBITDA yield perspective?
spk02: Yeah, I mean, it really depends on the market and how quickly we can adjust pricing. So it usually takes, you know, on average of about three years, maybe four if markets are slower. to go from, you know, pre-renovation numbers to numbers that, you know, we're shooting to average about a 10% cash yield on the renovation dollars, the redevelopment dollars in particular. So, you know, the pace varies by market. Some markets we can do it quicker because we're not held back by group rates that are on the books for future years. A good example would be Estancia, where we don't do convention-related business, and most of our group books within 12 months of arrival. So we can increase rates more quickly in a market and a property like that than we can, say, in downtown San Diego, where we've locked in convention rates in many cases for two or three years. Now, some of those markets will be able to get adjustments by going back to the convention authority and the client to get increases because of the investments made in the properties, but that isn't always the case. So it's generally three to four years. And I mean, frankly, the easiest way to think about it is pretty much evenly over that period of time.
spk01: Okay.
spk02: Thanks, John. Thanks, Dori.
spk01: Thank you. The next question is coming from Smeets Rose of Citi. Please go ahead.
spk11: Hi. Thanks. I just wanted to ask you a little bit more on sort of how you're thinking about margins going forward. It sounds like the pace of cost increases is maybe easing, but concurrently it seems like, you know, the red part is sort of flattish, but you're shifting to higher occupancy and lower rates. That seems like that would kind of weigh on margin a little bit as well. I'm just wondering if you could maybe, if there's any sort of back of the envelope, you know, thoughts on that kind of shift if occupancy goes up and rate goes down. What does that do to margin?
spk02: Well, I think we've seen what that does on margins as we brought our staffing levels up to full staffing towards the end of last year. And you've seen what that's done to margins over the first couple of quarters here. And we'll see more margin degradation on a year-over-year basis in Q3, although it ought to be lower than the impact in Q2 because we started restaffing in really September of last year is when we started to have a lot of success at our properties filling those open positions. So I think over time, it's obviously that would be a terrible long-term trend if that were to occur. We don't think that's necessarily the case. We think the resorts are really moving back to a more normalized level. And the good news is, as indicated by my numbers that I provided, I think we're stabilizing we're likely to stabilize here at a far higher level, maybe 60% to 70% higher than where we were in 19 with rates. And the second thing we need to come back, which will help, is volume, partly why the occupancy flows better. It doesn't flow as well as rate, but it's going to flow well here as we're fully staffed outside of the marginal costs of adding temporary folks for banquets and catering. So I do think as we get towards the fourth quarter, you'll see margin degradation shrink significantly. And as we move into next year, I think our cost basis will more normalize on a year-over-year basis. And we'll see what happens with rates next year. That'll depend on the macro environment. And of course, that'll depend upon what's going on from an overall demand perspective. But I think we feel good about demand continuing to recover next year, particularly in the urban markets. We think the outbound international demand that's on a sort of revenge travel basis, as well as some cruising, You know, we think that reverts back to being some of that being domestic and that should help next year from a demand perspective. And then we have a lot of international inbound that's not yet fully recovered. And we think, you know, that'll continue to recover next year. So all of that should allow us to grow occupancies next year and volume with group coming back more. Right now our pace for 24. is in good shape. We're up, you know, over 11%, almost 12% in group room nights for next year. And it's that volume that we need that'll flow well to the bottom line. So because we're not at a normalized pace, we really need that volume to come back to get to the higher levels to support the sort of level of fixed staff that we have at our properties.
spk06: And to me, also, to add to that, I think there's a tendency to look at the current quarter's margins and assume that's a new run rate. And I think what you have to really carve out is, because of all the renovations we had in the quarter, that created a lot of disruption, not just on REF PAR, but also in food and beverage. You look at Solomar, Estancia, and Hilton Gaslamp during the renovations this quarter, you really can't have group meetings when you have the hotel under construction, or it's very difficult. So that also causes impacts. I went and draw conclusions about For example, food and beverage margins in Q2, and is that a new run rate? There is a lot of noise in there, as John indicated, as we stabilize and have a normal mix, and we're still about 13% down, occupancy points down to 19. As we gain those demand segments, that will also help margins, given the fixed cost nature of a lot of our properties.
spk11: Thanks. And John, can I just ask you, you mentioned that weekday business urban continues to pick up, I think, driven by business transient. But you did note that it was at a more gradual rate, which is something that we also see kind of in the numbers looking across the second quarter sort of nationwide. And it's something we hear from other companies. And I'm just wondering, is there anything in particular that you would attribute a slightly slower recovery in business transient relative to initial expectations? Or do you think it's just going to take longer? Or do you think some of it's gone away or? Maybe just your thoughts there.
spk02: I think it's probably all of the above. And by the way, my comment about the slowdown in the rate of business recovery related to the industry more so than us. I mean, if our urban market weekday occupancy was up 5.2% over last year. So, you know, we continue to see we picked up, you know, over five points of occupancy It's really a 7.6% growth on a percentage basis. So we, obviously the cities and particularly some of the cities we're in have been slower to recover that business travel. It is coming back. I don't think we know where it's going to end up yet with all the different factors. Businesses are still changing their in-office requirements. We've seen You know, no, no requirement to be in the office to go to three days to go to four days. Some have gone to five days we've seen announcements of companies, particularly on the west coast. That went to none and are now leasing office space and bringing people back at least three days a week. So I think it's a little early to figure out where we end up We're just really past the point where I think people feel normal again in traveling. I mean, you still see masks here and there, but I think in general, people are forgetting the pandemic and that leads back to normal travel. So I think perhaps we've lost some of it permanently. Perhaps it gets replaced by what we call hybrid travel. Others have called leisure. You know, we definitely continue to see that. One of the trends we've seen is, you know, there's businesses a little slower to book business around holidays as people are probably taking longer holidays and have more flexibility because they're not back at the office yet. So I don't know how it's all going to end up, but if you look over the last hundred years, you know, business travel generally follows GDP. And we think that connection, you know, we'll recover back to that connection again.
spk11: Thank you. Appreciate it.
spk01: Thank you. The next question is coming from Bill Crow of Raymond James. Please go ahead.
spk07: Hey, good morning. John, one for you, and then I'll turn it right for a second. But, uh, On the cap rates that you used in your NAV calculation, I was intrigued by the cap rates in the twos, I think, in San Francisco, and then what I thought were low cap rates in Portland and Washington, D.C. I get it. There's not much NOI, and I also remember some, I'll put it in raised terms, what, 45 or so conference calls ago when you were buying in San Francisco in the low twos. My question, I guess, is if you didn't have a desire to pay down debt, if you didn't have a desire to buy back stock, would you be buying assets at a two-cap rate in San Francisco today?
spk02: So a couple things. Obviously, the cap rates are a result of a much more analytical decision a buyer makes as to why they buy a property and what kind of total returns that they're looking for, just like we do, right? We're We look at five-year cash flows. We look at five-year IRRs. We look at price per key. We look at comparison to replacement costs. There's a lot of different things you look at in a market when you're underwriting. So we don't use cap rates to determine decisions in the markets, nor do we think buyers, frankly, use cap rates. They do look at yields overall. and the growth in yields over time and those changes. But unlike maybe some other property types, you know, cap rate is not a methodology for determining value. To your question about would we be buying in some of those markets, you know, one of the things I think has become more challenging in the public markets is the public market shareholder has become far more short-term oriented than they were when we started Pebble Brook. And so I think they're less willing to look at long-term potential value creation within the asset portfolio than they were, you know, 13 years ago when we started the company. And so I think it becomes harder for a public company like us in our space to buy in markets where there's a lack of yield. And therefore, I don't know that we would as a company be buying there. I think if I had the opportunity personally, which I unfortunately do not, so just keep that in mind, but if it were me personally, with a long-term horizon for my investment returns, I think it's a great time to be buying in these markets. I think they're incredibly cheap. The discounts to replacement cost, which is an indicator of when supply can be economically justified in a market, I think that discount is much bigger than it was back in 2010 and 11 when we started buying. I think it's a great time. If you have the right time horizon, you can live with expensive debt in the near term with low yields. And so personally, I'd be buying, or if somebody had a long horizon, I think it's a great time. But I think for us as a public company, it's more challenging.
spk07: Yeah, I appreciate that insight, John. Two quickies, I hope. Ray, I'd like to get your thoughts on BI Third quarter was higher than we would have guessed in your guidance, at least from a seasonal perspective. So I wonder what the fourth quarter looks like, if you can give us an idea, and then what would be thought to be left over for next year. And then the second quick question, hopefully, is you're wrapping up this massive strategic repositioning program. But you're kind of seven years, almost seven years into it, and I'm wondering if we're going to start to see a new cycle begin, or do we actually have an extended period of time with no renovation disruptions?
spk06: Sure. Well, first, in the BI, that's a result of the progress we make with our insurance carriers. So we submit what we believe the hotel would have done without any sort of a storm. and we have to negotiate with our carriers. So that's a result of that. So it's hard to really say the exact number we'll get in future quarters here. The second quarter that we came in.
spk02: It also depends upon how much we lost. I mean, we've been losing money at La Playa while it's open, and we lost more money in the quarter, as an example, than we thought.
spk06: Yeah, so it's a handful of factors that we go through. Ultimately, exactly. For example, in the second quarter, we were able to negotiate and agree to a higher amount of 14 versus the 10 we were expecting. It's not to think we're going to do the same in the third quarter, but we'll see our progress there. Fourth quarter, I would think it would be a lower number because these tend to be a quarter in arrears. So what we booked for the second quarter here at 14 million, that's a result of the first quarter and so forth. And typically it'll apply, it's seasonally weaker in the third quarter, the summer months, but you know down in southern Florida, August, September tend to be pretty hot down there with hurricane risk. So that would be left behind number there. So I wouldn't assume much for the fourth quarter. If it is, it's in the single million kind of range-ish area. And then as we think about 2024, that will depend on the ramp-up of La Playa. As we noted, we think the hotel, the resort will be substantially completed by the end of this year. There will be a ramp-up component. It doesn't get all the way back to La prior levels right when we start in the quarter. So there may be some trailing BI we're able to get as a result of that. So that will be less than we expected. You know, we expected this year La Playa to be generating in the neighborhood of about $35 million of EBITDA, and that's the number we're targeting on the BI side. And how it trails off in 2024 depends on the recovery and bounce back of La Playa. And then the second question on the renovation area for the seven-year cycle or whatever that is, We look at each asset by asset with our asset management team and look at the capital there. Fortunately, when we look back at the renovations and redevelopments we do, we tend to do a very good job. These are not just cursory sort of refreshes in the guest rooms. These are really substantial renovation, good quality FF&E goods and those items that tend to do last longer. And we're forward thinking design. I wouldn't necessarily think that if a property wasn't renovated in 70 years, we have to go through another major redevelopment project here. As John indicated, we do think for the next couple of years here, we're going to have very little any sort of disruption from any renovation activity. Here and there, we may do a refresh, but not really many redevelopment projects to be worried about as we think about 24 and beyond.
spk02: And Bill, in that regard, I think You know, everything we buy for our hotels is custom made. We're not buying from Ikea. We're not buying from the sort of standard low-cost manufacturers. And we also don't let our property sit for seven years or 10 years or 12 years either. We're constantly refreshing. We're recovering sofas. We're replacing them. We're buying new pillows. But these things don't have a material impact. I mean, even what we're doing, we're doing a meeting space refresh at the W Boston this summer. It doesn't really have a whole lot of impact on the performance of the property. And it's primarily a soft goods refresh. So it's not out of service very long. So If you think about our portfolio, we're not doing a renovation when we do these projects. We're almost completely rebuilding it in many cases, at least on the interiors, and often doing behind-the-wall work as well. But all of that regular capital maintenance is an ongoing effort on our part.
spk07: Thanks for the insights. Appreciate it.
spk01: Thank you. The next question is coming from Dwayne Fenningworth of Evercore ISI. Please go ahead.
spk10: Hey, thanks. Just to follow up on Bill's question on BI, when you think about kind of Naples and La Playa in its entirety and kind of the timing of BI that may fall into 2024 and the recovery of that property, How should we think about growth, EBITDA growth, you know, inclusive of BI, inclusive of operations, kind of 24 over 23?
spk06: Yeah, that's a nice crystal ball. Well, fortunately, we've mentioned this before with other properties in the rebuild. We have seen that Naples tends to rebound somewhat quicker than some other markets like, say, Key West, as an example. So we expect La Playa to be bouncing back quicker. But there are a lot of factors. I think, you know, net-net, I think maybe the more conservative way to think is that the overall EBITDA contributed by La Playa inclusive of BI would be less than 24 than it is in 23 because we're getting the full-fledged number. And there will be a ramp-up area there. But as we get forward and we get closer to the completion there and ultimately resolving with our insurance carriers what we're able to negotiate here, we'll be able to provide a better color that as we start the year. But there certainly will be a ramp up and there's always unintended consequences. You start up a property, a chiller doesn't work quite well that you thought would. There's a lot of things that will be these tail items that we'll be dealing with, much like we did when we were dealing with Ian five years ago.
spk10: Thanks for those thoughts. And then just a distribution question. Can you talk a little bit about how you build awareness for the upgrades and the renovated hotels, particularly for your independent hotels. How does this education process happen for customers? Any new thoughts on distribution for your operators? Thank you. Sure.
spk02: So it's a pretty comprehensive. Typically, we'd sit down, our asset managers sit down with our operating team their corporate marketing staff as well, put together the playbook for reintroducing a redeveloped property. Sometimes it's renamed. Sometimes it's reflagged or flag removed. Sometimes it's the same name but just an upgraded product. And it's comprehensive. It's marketing. It's PR. It's a direct sales effort. It's using digital media. It's offering promotions up front to get people to come and do a trial of the new product. We'll be conducting tours. You know, we've had, you know, probably hundreds of tours for a group at Margaritaville in downtown San Diego at this point already. And we'll share renderings, which are photo quality renderings, et cetera. So it's a very comprehensive effort to get the word out. There's usually opening events, though we're not big believers in the big opening party necessarily versus... having 10 events that involve bringing salespeople, both on the group and the transient side, and the corporate side to the property. So it's pretty comprehensive. We'll spend significant dollars, certainly hundreds of thousands of dollars, and if it's a big property and a big project, just like in Naples, You know, we'll, like we did last time, we'll spend hundreds of thousands of dollars extra on sales and marketing activities down at La Playa because it's been closed for effectively over a year. And we need to get it back in people's minds to come back down again. So pretty comprehensive plan put together with our operators. that's been successful in the past. Thank you. Thanks, Dwayne.
spk01: Thank you. Excuse me. Thank you. The next question is coming from Floris Van Dykem of Compass Point. Please go ahead.
spk03: Thanks. I have, I guess, two questions. If you could touch on the balance sheet a little bit. You know, Ray, you've been, you're building up $175 million cash cushion. You talked about some of the the you don't have any near-term maturities but but longer-term maturity or you know your debt is fairly short the weighted average maturity is you know i think just over two years um do you see a comprehensive uh refinancing of that and where would you maybe talk a little bit about the cost of where you think you would borrow uh today obviously people investors were a little scared when uh blackstone refinanced uh put a lot of debt on Hotel Dell, but I had to borrow at 9.5% or somewhere in that neighborhood. And Piedmont, an office company, I know you're not office, but recently did a five-year note at 9.25%. Maybe if you can touch on where you think you would be able to tap unsecured borrowings at today.
spk06: Sure. Well, a couple of things as we look at our balance. You're right. We have over $180 million of of cash on our balance sheet. And fortunately, we have very minimal maturities this year. We have some term loans maturing in 24. Actually, our weighted average maturity is actually close to three years, not two. But as we think about it, you should assume that the additional cash that we're building up here we'll be using to address some of these 24 maturities, as well as having conversations with our bank groups with some of the term loans, with paying down some and perhaps maybe extending a portion of that out. So it's a part of the overall plan that we have been thinking about actively, and we do it in concert with how we deploy our capital for stock buybacks and what we hold back for debt. And also, we have ongoing conversations with all of our banks all the time, so these are all done in a very good manner, and these are relationships we've had for a long time. So you should expect that we are planning and addressing those actively as we think about 2024. As it relates to New sort of debt. So first of all, right now our spreads on our lines about 220. So if we have a completely unused credit facility that we can borrow about 220 over, that's relatively low. New debt, if we originate a property sort of loan, if that's your question. You know, somewhere, it looks like the markets right now are somewhere, so for plus 375 to 450 is probably the range of a lot of debt we're hearing. It obviously depends a lot on the market. If you're in a kind of resort sort of location or asset generating good cash flow, the spread might be lower. If you're in an asset that's a little more, a market that's more challenged, that spread probably could be wider. I can't speak to what Blackstone did or didn't, but something like 375 to 425, 450 over is probably like a level for new borrowings. So we'll look at that as we address overall our debt maturities and we have a property loan maturing Next May, Margaritaville, that asset is highly financeable and would garner a lot of interest, so we'll look at our options there. Vis-a-vis, well, it's also happening with our balance sheet and our growing cash reserves.
spk03: Thanks. And maybe my follow-up, if you can touch on the San Diego market in particular, you've got a number of renovations that have just finished. You've got, I guess, the Margaritaville is still yet to be completed. But maybe touch on the outlook for that market. And I note that, you know, peak EBITDA or, you know, for those assets was, you know, I believe 37 million. You're on track right now of 29. Is this a market that can generate 50 million of EBITDA in your view? And maybe talk a little bit about the convention calendar going forward as well.
spk02: Sure. So I would say San Diego's, at least for the near term, the strongest market we see in our portfolio. And we have all four of our downtown properties come, you know, August here will have had major redevelopment. The Westin, an $18 million project, the embassy suites, a similar number. for a smaller property. These two projects in the mid-20s, millions, they've all been repositioned higher in the market. The convention calendar, and so when you look at Q2 numbers that we report for San Diego, keep in mind it involves two properties downtown and Estancia that were all dramatically impacted in the quarter. was actually a good quarter for the non-renovated properties. Convention calendar is very good for the second half of the year. It's very strong in the fourth quarter. And it's going to make an all-time new record in 2024 based upon what they have on the books. It's huge, actually, even compared to this year, which was, I think, pretty close to the all-time record. And there's no new supply in the marketplace. And the weather, I guess, continues to be pretty favorable. And if it's getting hotter in other places, it only helps drive leisure into that marketplace. So really, really attractive market, why we've made such a large investment there. And we do think there's an opportunity for dramatic improvement in EBITDA over the next few years.
spk06: And, Flores, just to put that perspective of the convention center side, for 2023, the markets projected to generate about 800,000 convention center room nights. In 2024, that increases to 930,000. And even in 2025, it's another strong year at 850,000, which would be one of the best years. These are as good as the previous best years back in 2016. So the next few years in San Diego look very good. And why we're encouraged and why we're glad we invested capital in those assets in San which would benefit from the strength in the market.
spk02: And I think it's, you know, the city and the market went through, you know, some challenges when the football team moved up to L.A., basically. But you look at where they've gone since. They just got awarded an MLS franchise for soccer, the women's soccer team. has broken records compared to other teams around the country in attendance. They're attracting lots of concerts and sporting events into that market. And we all know that the life sciences side of the economic base continues to grow dramatically. And San Diego is one of the strongest in that market. In fact, the interesting thing about downtown is one of the opportunities it has, unlike other markets, is it's never had much corporate activity other than some defense contractors and the Navy and potentially Homeland Security being so close to the border. But it has significant amount of construction downtown that's geared to life science and lab space. And if in fact they're successful leasing that, it could have a dramatic impact on the demand levels downtown. So really exciting market and appreciate you asking about it.
spk03: If I can ask, or maybe just briefly follow up, how will your repositioned Margaritaville gas lamp cater to some of that convention? It's not a typical convention hotel. Do you think that's going to benefit from the compression or will people actually... will you get group into that hotel as well in your view?
spk02: We'll get group into that hotel. We have some great event space that's been dramatically improved from what it was as the Solimar. And as you know, Margaritaville is a strong attraction for that lifestyle vibe that people love, whether they're convention goers or they're leisure customers. So So we think it'll benefit from both segments in a material way.
spk03: Thanks. That's it for me.
spk01: Thank you. The next question is coming from Ari Klein of BMO Capital Markets. Please go ahead.
spk08: Thank you, and good morning. Maybe just following up on San Francisco market. maybe a little bit less exciting than San Diego. You took your cap rate assumptions higher in the latest NAV, still quite a bit exposed to the market. And one of your peers is largely throwing in the towel there. And it looks like the conference calendar next year is more challenged. So where do you think the market goes from here? And it seems like you do have long-term optimism. What kind of underlines that?
spk02: Yeah, I mean, we could get into a lengthy discussion about what the underlying demand factors are and the economic factors. I don't want to take too much time. I mean, you have one of the strongest economic bases in the country in San Francisco and the Bay Area. It's one of the largest and strongest life sciences market. It's obviously by far the biggest venture capital market. There's more businesses created in San Francisco than pretty much the entire rest of the country. It's the center of AI, which of course has tremendous potential growth that folks are talking about. We've already seen some of that growth as those companies raise capital, they hire people, they need offices. We're also seeing some relocation of businesses from outside of San Francisco into San Francisco. to take advantage of low office rates and sublease rates. San Francisco is one of those cities that, because of the educational cluster there, the technology cluster, the culture of it's okay to fail and start over, all of that is such a big factor. And then I would tell you the politics have already had a significant move to the center. and a recognition that we have to address these issues, these basic issues of safety and life sciences. And I think the media is about nine months behind the reality on the ground. I think it's, frankly, it's a safer, cleaner place than it was in 19. And I think that that'll continue to improve. So we continue to believe in San Francisco in the long term. But we have reduced our concentration there, which had gotten into the mid-20s, which we thought was too high.
spk08: Thanks. And then maybe just reflecting on the hold music, can you give us some color on what kind of benefit you saw from the flipped effect during the quarter in any way you can quantify the impact?
spk02: Well, it's interesting. In Chicago, I think, I mean, you probably saw the media reports, but Chicago had its highest rev par day, I think, ever the weekend that she was there. And it's not just her. I mean, the Dead, we had one of the strongest weekends since pre-pandemic in San Francisco when the Dead gave their supposed final concerts ever. the inevitable final tour that is never final. And we look at LA, Taylor Swift has six dates in the first 10 days of August at SoFi, and we've already seen significant pickup as a result of that. And we have all kinds of promotions at our properties related to Taylor Swift as well. It's pretty meaningful in these markets. It's a big demand driver. I remember a few years ago, pre-pandemic, Garth Brooks did five shows in a row in San Diego, sold out Petco five nights in a row, and we sold out our hotels five nights in a row at premium rates. So it's material when these big-name entertainers come into the markets.
spk06: Ari, when you think about Taylor Swift, just envision her. She's a rolling Super Bowl. She goes in and she helps the market across. So that's partly why the music was a nod to her. And it's been great. So a big Neal mover this year.
spk08: All right. Appreciate all the comments. Thank you.
spk01: Thank you. The next question is coming from Michael Bellisario of Baird. Please go ahead.
spk04: Thanks. Good morning, everyone. First question, I want to come back to the margin topic from earlier. Kind of big picture, high level, is there a sort of a normalized run rate for expenses that you're thinking about or that we should be thinking about, whether it's for your markets, your portfolio, as we look out to 24 and 25?
spk02: I wish it was that easy, Mike, but, you know, when we're not in a normalized range, operating environment yet. And, you know, we're moving closer to it. I think we're at normalized staffing levels, but for marginal staffing related to, you know, marginal occupancy recovery that we expect to see here. But I don't think that translates into any kind of stabilized margins at this point. So there's a lot of volume we need back that will flow really well. once we get that volume back, whether that's on the room side or it's on the F&B side, particularly from recovery of groups. So, unfortunately, we don't have what you're looking for. Therefore, we can't give it to you.
spk06: But, Mike, in general, though, we touched on this on our call. We are seeing a more moderated expenses. The wage rates are the growth rates are coming down versus what they were last year. So that should be less of a headwind going forward. And then other is the supply costs with food and beverage. Those input costs are also moderating versus where they were last year. So those should be improving factors in the margins there. Now, headwinds that we will have for the next 12 months are property taxes that we talked about. That increased. It's $9.3 million a year. That's 50 basis points or so in margins. And hopefully that stabilizes at some point in time. And energy has also been somewhat of a headwind that's moderating. So there's different inputs. You have to look at labor differently than you have to look at some of these other costs like energy and property insurance. And what should be a positive deflationary factor is some of the property tax reductions that we're successful on achieving and hopefully we'll have more to report on in the coming quarters.
spk02: And, Mike, the thing I would suggest, and frankly we've always suggested this, but just as a reminder, We don't forecast margins. Margins are a result of forecasting revenues and expenses. It's a lot easier to say we think expenses are going to be 4% or 5% or 3% growth on a year-over-year basis, depending upon volume levels, than it is to forecast margins for each category. So certainly in building your models, we'd suggest you frankly use an expense escalator and a revenue escalator as opposed to trying to solve, start with margins.
spk04: Thanks for that. Figure it out, ask. And then just switching gears quickly just on the transaction front, maybe over the last 90 days, what's changed and are you seeing any buyer interest get better or worse in any particular markets where you're looking to sell hotels?
spk00: Yeah, Mike, I don't think much has changed. I mean, I think you read about it in the press in terms of all property types with transaction volume being down largely as a result of the availability of the debt or lower proceeds, high cost debt. So I would say that it remains challenging. I would say that certainly, you know, the deals that are getting done, you know, it's high cash flowing deals that are either resorts or select services. I would say maybe the one pivot that we're seeing, and I think John mentioned it earlier, is that in some of these longer to recover markets, people are becoming a little more yield focused. And so it's impacting in terms of their potential pricing because their pro forma and their underwriting is taking that much longer to get to peak, which is obviously impacting pricing. But I would say that there still remains a lot of investor interest. I think they're just trying to pick what is their level of conviction to move into a market?
spk04: Thank you.
spk01: Thank you. The next question is coming from Gregory Miller of Truist Securities. Please go ahead.
spk09: Thanks. Good morning. I'd also like to ask about 2024 for Southern Florida. For the upcoming winter 2024 season, and perhaps reflecting your commentary on revenge leisure travel normalizing. How are room rates trending next winter in markets like Key West and Hollywood Beach relative to 1Q 2023? How impactful do you expect your winter 2024 rates to be given a theoretical normalization of revenge leisure travel?
spk02: Thanks. Tough question. I don't think we have the first quarter numbers handy in terms of what's on the books in the Florida market. First of all, there's not a lot on the books this far out in those markets. I think there's an opportunity to normalize and we still have demand to recover. occupancy to recover in those markets, particularly down in Key West, which had that up and down kind of swing. We're still running lower occupancies. But in the second half of this year, it looks like we're getting a little bit closer to more normalized demand if you trace it back to 19. So I don't have anything to give you yet. I mean, we can go through the data offline. and have a conversation about what those rates look like. But I wouldn't read a whole lot into them just yet, given the low amount of business that's on the books.
spk06: Yeah, and it also would be inaccurate to read too much into if we have 1,000 more room nights booked this time versus last time last year. It's not as much as what happens really close to the end because we're outside the booking window, really.
spk09: Thanks. That's understandable. For my follow-up question, I thought I'd try to ask for some clarity on what's going on in San Francisco on a group side relative to the PACE figures that you noted in your release and the 2024 numbers you mentioned in response to Smeet's question. How is your San Francisco group revenue pace looking for 2H23 and for 2024?
spk02: Yeah, so it's up significantly for the second half of this year, not surprisingly, given the convention calendar there, as well as our properties, particularly the one which is ramping up in that market and only opened in June of last year, is doing extremely well on group, despite the more limited amount of meeting space that we have. I think we're running around 25%. group mix at the one. And of course, we're doing it at high rates. So we're in pretty good shape in the second half. We'll see a nice continuing recovery in occupancies in San Francisco in the second half. And I think, as I said, the second half comparisons to 22 are much better than the first half comparisons, yet we still recovered you know, 13 points of occupancy in the first half of the year, and that does not include the one because it wasn't open last year. As it relates to 24, the convention calendar is up in the first half, and I don't know the bookings offhand for that market. We can look them up and get back to you, but I presume that our group bookings are going to track the convention calendar ultimately in that market, and Just keep in mind that a lot of our properties may not participate in the conventions because of their small size, but they'll get in conjunction with group. Occasionally, we even sell out properties like Zeta to one group who takes the whole property because of its size. So we're optimistic about the first half of next year. And the good news about San Francisco is, again, I think, I think the quality of life has already gotten better on the ground and will continue to. I think the perception will catch up with the reality as we move further away from the negative headlines that we've seen. And businesses are coming back and we're seeing more and more positive indicators of demand recovery in that market. So we have a lot of time to help fix the second half. And then right now, 25 is up, I think, about 100,000, 80 to 100,000 rooms compared to 24, and with still time to fill more in that space in that year. So there's a pretty big effort going in on the part of the convention authority and, of course, part of all the hotels in the market to get in-house group to backfill for convention business that is down in the second half of next year.
spk09: Thanks. That's all I have. Appreciate it. Thanks, Greg.
spk01: Thank you. Our final question today is coming from Anthony Powell of Barclays. Please go ahead.
spk12: Hi. Good morning. There's a question on international travel. I think you said that you expect the revenge nature of that to, I guess, proceed next year. How do we know that? I mean, we know the airlines are adding more capacity to go international markets. International markets are obviously appealing. It's going to be a bit cheaper in terms of just food and beverage and whatnot. I'm curious what your view of international destination travel versus domestic will be going forward.
spk02: I think it's a lot of anecdotal evidence. And it's also, I think if we look at our experience with, I'll use this defined term, revenge travel again, in other segments for other reasons, I think we see the same thing happen. So I think when you look at outbound, it's fully recovered and in fact over the historical norm, particularly to Europe. And again, we think that normalizes. There's a lot of people who had trips canceled Ray's one of them sitting here at the table, but I have a lot of friends and others who had trips canceled because of the pandemic who took them this year. And they don't go every year. So I do think on an outbound basis, we'll see that normalized next year. I think it's rational to think that. And I think it's also gotten a lot more expensive to travel abroad. As we know, the international ticket prices are way up from where they were. And on the other side of it, we're starting to see a decline in the domestic ticket prices here in the U.S. So some of that will have an impact. And so I think we feel pretty comfortable that that's likely to happen. And by the way, I think capacity growth is important. because inbound travel to the U.S. still has a long way to go to recover. So it's not like global international travel is necessarily going to decline. It's just going to go in different directions.
spk06: And, Anthony, actually the other side of your question is, so we have strong outbound U.S. travel at international markets, which we think will more kind of normalize the next year with less going out. What we haven't really experienced a big benefit here in the U.S. is inbound international travel. I mean, Europe travel is up versus where it was last year, but it's still well below pre-pandemic levels. And the Asian traveler is very, very weak. That really hasn't largely come into the U.S. So that should be a tailwind that we should see at some point in time. I mean, who knows when China opens up and they start coming back here, but certainly from what we're hearing about the Japanese and Korean traveler in the Pacific there, we should see some more benefits as we get into 24 and beyond. which we haven't used so far today.
spk12: That was my next question, actually. So what are the remaining, I guess, gating factors to international inbound travel? Are these requirements any kind of border issues that can be eased by the government or other entities to get that international inbound travel back to prior level?
spk02: Yeah, the industry and U.S. travel have been working with the government. Remember, we went through this once before with the Obama administration. to staff back up and reduce the wait time for visas into the U.S. So that's one item that needs to be improved, and we're told they expect to make some progress, though they need to get more money allocated in the budget for staffing levels. The second thing is there's an issue with China-U.S. travel because of the Russian war on Ukraine and the fact that US airlines can't fly a route that goes over Russia, which is a shorter route, while the Asian carriers can. And so there's a dispute about effectively it being subsidized because it's lower cost to go the shorter route. And that's unresolved as well. So that's a diplomatic solution, not just an economic solution. So there are a couple of those things that are important to get resolved. But generally, we think just like Americans decided finally when they felt comfortable after they'd done their catch up with their families to go abroad, we think we'll see that continue to help international recover. And by the way, it is recovering every month compared to 19, so we think that'll continue.
spk12: All right. Thank you.
spk02: Thanks, Anthony. Thanks, Anthony. Hey, Anthony, you'll be remembered as the last question in my 100th public earnings call, so put that award up on your wall. And to everyone else, thank you very much for your questions and your participation. We appreciate you hanging in here so we could answer everybody's questions and their follow-up questions, and we look forward to updating you through the course of the quarter as well as after the end of the quarter in October. Have a great rest of the summer.
spk01: Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines at this time and enjoy the rest of your day. Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines at this time.
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