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spk08: Ladies and gentlemen, thank you for your patience and please remain on the line. Today's Pebblebrook Hotel Trust Conference will be starting shortly. Again, we do thank you for your patience and ask that you please remain on the line. Today's conference will be starting shortly.
spk10: I'm coming up, I want the rock to roll, got the rock to roll. I'm coming up, I want the rock to roll, got the rock to roll. I'm coming up, I have a shot that I'm coming up. I want the rock to roll, got the rock to roll. I'm coming up. I'm coming up, I'm coming up. I'm coming up. I'm coming up, I want the rock to roll, got the rock to roll. There's a new me coming up and I just have to live. And I won't again, I'm completely positive. I think this time around I am going to do it like you never knew it. Oh, I'll make it through. The time has come for me to break...
spk08: Greetings and welcome to the Pebblebrook Hotel Trust Fourth 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.
spk15: Thank you, Donna, and good morning, everyone. Welcome to our fourth quarter, 2023 Earnings Call and Webcast. Joining me today is John Boards, our Chairman and Chief Executive Officer, and Tom Fisher, our Co-President and Chief Investment Officer. But before we start, a reminder that today's comments are effective for only February 22nd, 2024. Our comments include forward-looking statements under federal securities laws. Actual results could differ materially from our comments. Please refer to our latest SEC funds for this detailed discussion of potential risk factors and our website for reconciliations of non-GAAP financial measures referred to during this call. And in 2023, our portfolio continued to recover from the negative impact of the pandemic. This is a testament to the dedication, innovation, and resilience of our hotel teams and operating partners. Their exceptional contributions were instrumental in propelling our portfolio's growth and recovery in 2023, and we thank them for their support and hard work. We are delighted to report favorable operating and financial results for 2023. In addition, our adjusted EBITDA reached $356.4 million, exceeding the top end of our outlook by $6.5 million in the fourth quarter, as adjusted EBITDA increased to $63.3 million. Our adjusted funds from operations per share also surpassed our outlook, ending the year at $1.60 per share, with the fourth quarter at $0.21, beating the top end of our Q4 outlook by $0.07 per share. This -than-expected performance in the fourth quarter was fueled by our urban hotels, which continue to experience a healthy recovery in corporate transient and group demand, including from improving convention calendars and recovering leisure travel in the cities, driven by concerts and sporting events. San Francisco, Washington, D.C., Boston, and Los Angeles led our urban strength. Focusing on our 2023 hotel operating results, occupancy rates increased 4.6 occupancy points to 67.7%. However, this level is still well below our pre-pandemic occupancy of 81% in 2019 and our peak occupancy of 85% in 2016. This gap highlights our portfolio's significant remaining growth potential, particularly at our urban properties, which are on a promising recovery path. In 2023, our urban hotel has achieved an occupancy rate of 68.4%, marking a .5% increase from the previous year, yet is still 15% points below 2019 levels. Washington, D.C., led the recovery with a significant 15-point rise to 64%, up from 49% in 2022. San Francisco also showed substantial improvement with occupancy climbing 61% from 47% in 2022. Our Los Angeles portfolio also managed to achieve significant occupancy growth in 2023, increasing from 64% to 73%, despite facing challenges from entertainment industry strikes and adverse weather conditions that significantly affected demand. Our Boston portfolio, our largest urban market by EBITDA, achieved 78% occupancy, similar to last year, and Boston represents the market with the highest occupancy levels in our urban markets, yet it remains well below the 88% level achieved in 2019. During the fourth quarter at our urban hotels, weekday occupancy rates rose by 4% points to 64%, while weekend occupancy is increased by more than 2% points to 69%. This demonstrates that the uptick in demand was powered by both business and leisure travel. These are positive indicators heading into 2024. For 2023, our resorts maintained their strong performance, with occupancy rates rising by approximately 2% points to 65.8%, despite the negative impact of significant disruptive redevelopments at Asuncia La Jolla, Jekyll Island Club Resort, and Southernmost Resort Key West during the year. Like our urban hotels, our resorts have also had substantial opportunity to regain lost occupancy from 2019, as occupancy achieved .4% in 2019, 8.5 points above 2023. In the fourth quarter, our resorts benefited from increased business group demand, as evidenced by the 1% point rise in weekday resort occupancies over the comparable prior year period. At weekend, resort rates surged by 7 points to 74.6%, highlighting the enduring appeal of leisure travel in the tracking of our redeveloped and repositioned resorts. Despite a .3% decrease in average rates during 2023, there was a trend towards rate stabilization, with a more modest .9% decline in the fourth quarter. Even with this normalization, our resort room rates in 2023 remain 40% or $108 higher on average than in 2019. Across the portfolio, same property rep bar for 2023, so our .2% increase year of year increase, while the same property total rep bar grew by 5.9%, indicating continued strong non-room revenue growth along substantial occupancy improvements. This progress was achieved despite an approximate 113 basis point negative impact on renovations, showcasing our portfolio's robustness and potential for future growth. Our urban properties experienced a significant uplift in 2023, with a .3% increase in rep bar and an .3% rise in total rep bar. Our resort rep bar declined by .5% from 2022, but total rep bar decreased by just 2.8%, as healthy non-room spending and occupancy gains helped mitigate the non-room rate decline. For Q4, total rep bar increased by 5.7%, with our urban properties realizing an .8% gain and a resort's flattish with a .4% decline. For 2023, same property EBITDA came in at $350.9 million, with Q4 at $66.6 million, exceeding the top end of our outlook by $3.6 million, thanks again to better than expected urban demand recovery in Q4. During 2023, our hotel EBITDA experienced several challenges that impacted our performance, including renovation disruptions, which we estimated had a negative impact of $12.7 million. Additionally, severe adverse weather events and the L.A. writer's and actor's strikes contributed to an estimated negative $3.5 million impact. However, these negative effects were significantly offset by approximately $12 million worth of real estate tax credits and general liability insurance savings. Consequently, the net negative impact of these one-time items on hotel EBITDA totaled approximately $5.5 million. We expect significant additional real estate tax credits as we achieve successful tax assessment appeals over the next few years. However, the timing is hard to forecast, so we have not included any in our 2024 outlook. Hotel operating expenses were effectively managing Q4, with combined departmental and undistributed expenses up just .2% versus a .8% total revenue increase. And on a per-occupied room basis, they had increased by 5.3%. Same property EBITDA margins came in at 21.1%, which were flat the last year. Our Q4 margins would have increased 122 basis points more if not for the prior year real estate tax credits that benefited EBITDA and EBITDA margins. Overall, -over-year growth rate in our total hotel operating expenses, excluding property taxes, had declined materially over the year, from .8% up in Q1 to .2% in Q2 to .4% in Q3 and then 5% in Q4, all while growing occupancy considerably and other revenues like food and beverage even more significantly. This highlights our success in mitigating cost pressures across the portfolio, and our teams are proud to achieve these positive results. -over-year, we continue to see an overall reduction in inflationary headwinds. Wage rate pressures have been reduced materially -over-year, while our properties remain appropriately stat. And in 2023, we invested $152 million into our portfolio, which was primarily focused across six major redevelopment projects, including Margaritaville San Diego Gas Lamp, Hilton Gas Lamp, Asancia La Jolla, Jekyll Island Club Resort, Southermost Key West, and Newport Harbor Island Resort. Looking ahead to 2024, we were posted to complete three pivotal projects, the first of which was the comprehensive $49 million transformation and upscaling of Newport Harbor Island Resort, the $26 million luxury reposition of Asancia La Jolla Hotel and Spa, and the $20 million first phase of the additional alternative lodging, clamping units, cabins, villas, and infrastructure at Scamania Lodge. We anticipate completing all of these projects in the second quarter, marking a significant milestone in our comprehensive $540 million multiyear strategic capital reinvestment program. It's important to note that the vast majority of these returns on these recent investments have not yet been realized, but we anticipate significant improvements in market share and cash flow as they ramp up and stabilize. And as Diana Ross so beautifully sang in our opening song today, our properties are coming out in 2024. These major redevelopment disruptions are behind us, and the benefits of these major investment dollars are to come. Also, our capex requirements are set to decrease markedly to between $85 and $90 million in 2024. Shifting focus to La Paya Beach Resort and Club in Naples, we're happy to report that the restoration of the 79-room beach house and pool complex is expected to be substantially complete in the next week or two. This is the last of the rebuilding efforts following the extensive damage from Hurricane Ian. The resort and club look great, and it's better than ever. Reports to ramp up quickly with a restored product. As noted in last night's earnings release, we anticipate recognizing $11 million in business interruption proceeds in 2024 when we apply lost income for the second half of 2023 and early 2024. This has been incorporated into our 2024 outlook. This BI will impact adjusted EBITDA and adjusted FFO, but not same property sales. This compares to the $33 million of BI recognized in 2023. Our strategy in 2023 was successfully executed with seven property sales generating over $330 million in gross proceeds. The aggregate sales proceeds reflected a 20.2 times EBITDA multiple and a .2% NOI cap rate. Proceeds from our property sales were used to pay down over $179 million in net and for creative repurchases of common and preferred shares. From the start of 2023 through the end of January 2024, we repurchased approximately 6.8 million common shares at an average price of $14.07, including over 318,000 common shares recently purchased in January at an average price of $15.69. We also purchased two million shares of our Series H preferred equity shares at an average price of $15.90 per share, which is a 36% discount to the par value of the Series, with one million shares repurchased at the end of 2022 at $16, a 30% discount on par value, and one million of these shares recently purchased in Q4-23 at $15.79, a 37% discount. Following our debt paydowns and the extension of $357 million of bank term loans out of 2028, our next meaningful debt maturity is a $410 million bank term loan maturing in October 2025. You should anticipate that this maturity will be reduced and addressed from free cash flow and potentially proceeds from additional property sales, additional debt market activities, or from our $650 million undrawn, unsecured credit facility. And with that comprehensive update, I'd like to turn the call over to John. John?
spk11: Thanks, Ray. And good morning, everybody. I'm going to focus my comments on two topics. First, what we've seen in the industry most recently and what we expect for this year in terms of the industry performance, and second, how that translates into the future. And I'll be talking about the assumptions behind our company's outlook for Q1 and for full year 2024. As to the hotel industry, I believe the industry's reported performance in the second half of 2023 and so far in 2024 clearly evidences a softening in overall demand primarily in the mid to lower segments, perhaps indicating financial sensitivities in the middle to lower socioeconomic demand segments, likely resulting from the impacts of inflation, the reduction or elimination of extra savings from pandemic-era government transfer payments, and the dramatic increase in consumer credit rates. Perhaps it's just difficult comps for the middle to lower price point hotels, as others have suggested. But total industry demand hasn't exceeded restricted supply growth since March of last year, and it's been negative seven out of the last 10 months. This weaker overall industry performance has occurred at the same time that convention, group, business transient, particularly larger corporations, and international inbound travel all continue to recover, and while leisure travel remains healthy. The top 25 markets have outperformed the other markets by a wide margin, and the urban markets, which have previously been slower to recover, have performed by far the best. And while this softening demand has been almost completely focused on the mid to lower segments so far, we're not so naive to think that there can't be an impact in the higher segments at some point. We're humble, and we recognize we've never been through a pandemic and recovery before, let alone one where the Fed continues to work aggressively to slow down the economy to bring inflation down to its target. So far so good, as the economy has held up, and everyone who wants a job seems to have one. Yet we remain wary, though still cautiously optimistic, about 2024. It's extremely difficult to forecast how these conflicting economic waves will impact each other as we move forward in 2024, just as it was in 2023. All we can do is plan for different scenarios and monitor all of the macro and micro indicators very closely, and we'll let you know when we see the trends changing. As a result of this ongoing uncertainty, we plan to continue to provide monthly operating updates. Given the weak overall trends over the last 10 months, including January and also for February so far this year, we expect industry rep par for 2024 to be flat to up 2%. This forecast also assumes a so-called soft landing for the economy. We believe the Fed will remain diligent in its inflation lowering mission this year, and with expectations for rate cuts recently pushed later into the year, with fewer overall cuts now expected, we believe forecasts by the institutional prognosticators in our industry now seem a little optimistic, at least they do to us. We do believe that business travel, both group and transient, along with international inbound travel, will continue to recover, and these demand segments will continue to benefit the upper upscale segment and the urban markets primarily, and thus the top 25 markets versus the weaker other markets. I also want to point out that overall industry performance in 2023 and so far in 2024 has substantially benefited from the very strong performance of Las Vegas, a large, volatile and influential market affecting the total industry numbers. Excluding Las Vegas, the rest of the industry's performance was softer in 2023, and by our calculations, that weaker performance equated to 48 basis points or just shy of 1.5%. And remember, the public lodging rates and other institutional lodging investors generally don't own in Las Vegas. We would urge STR to publish industry numbers on a weekly, monthly and annual basis that excludes Las Vegas so we can all get a clear picture of the overall industry in which we live and invest. Las Vegas until recently was never included in the industry data and reports, so this is a new issue. Given our forecast for the industry's performance for 2024, we expect to do substantially better than the industry given our 60% or so concentration in major urban markets, including slower to recover markets, which have been accelerating. And we expect to do better due to the lack of material disruption from renovations and repositionings in 2024, which will soon be complete and from gaining RevPAR share from our many completed major repositionings and redevelopments over the last several years. Given our industry outlook for RevPAR growth of 0 to 2%, we're forecasting our same property RevPAR to increase 200 basis points more, so in the range of 2 to 4%. We expect most or all of it will come in occupancy gains. We're forecasting that our total same property revenue will increase in the range of 3 to 4.6%, and as a reminder, La Playa is not included in the same property numbers for 2023 or 2024. However, if we were to include it, La Playa would add about 50 basis points of RevPAR growth to our outlook. Encouragingly, our group pace is looking good for 2024. As of the beginning of February, group room night pace for this year was ahead of the same time last year by 12.5%, with ADR pacing 2% ahead of last year for a total group revenue pace advantage of 14.7%. Trangent room nights are also pacing ahead of 23 by 9.4%, with rate lower by 1.9%. Total group and transient pace for 2024 was ahead by 11% in room nights and total revenues, with ADR flat year over year as we continue to recover significant occupancy. While total pace is strong, we caution that booking trends have lengthened and continued to normalize, so these percentages will naturally decline as more businesses put on the books. Not surprisingly, our urban pace is stronger than our resort pace, but both are significantly ahead of last year. Right now, Q3 has the strongest pace advantage, followed by Q4, then Q2, and then Q1. We expect group will represent roughly 28 or 29% of our overall mix, which is up slightly from last year. Given a slower Q1 pace, our forecast for Q1 is for our same property revpar to be flat to up 2%, with total same property revenues higher by .8% to 2.8%. Weather on the West Coast and in South Florida has not been favorable so far this year, particularly in February, so even as we gain ground from not having much comparative negative impact from our major renovations and redevelopments in Q1, our resorts have suffered from softer leisure demand due to the weather. While January revpar growth increased a healthy 5.1%, February is on track to be roughly flat. Unfortunately, March's performance will be negatively impacted by the last week of the month due to the earlier arrival of the Easter holiday this year, but April, on the other hand, should benefit from this shift. For 2024, we expect same property total revenue growth to exceed same property revpar growth, as it did in 23, due to strong food and beverage and other revenue growth, some of which is a result of the continuing recovery in group and some as a result of the significant re-merchandising we've done at so many of our properties, where we've added more meeting space, event venues and bar outlets, improved some of our outdoor event and restaurant venues to increase the length of their outdoor operating seasons, and reconfigured and reconcepted restaurants to focus on increasing banquet and catering business and driving higher revenues and profits. For the year, we're forecasting same property expense growth in the range of .7% at the low end of our total revenue growth range to .3% at the higher end of the range. However, if we exclude the impact of $9 million of real estate tax credits in 2023, to get a better view of the underlying expense growth rate, it's about 100 basis points lower, implying an increase of .8% to 4.3%. Keep in mind that all of our revpar growth will likely come from occupancy growth, and food and beverage growth should outpace revpar growth due to increases in group business and total occupancy, both of which come with significant marginal expenses. Our expense growth assumptions are based on an expectation that combined wages and benefits will increase in the 4% range, give or take. Most other expenses will increase at a lower rate. Energy and insurance will grow at a much faster rate, and real estate taxes will show a much greater increase due to the $9 million of tax true ups in 2023. We expect a combination of LaPaya's operating performance and BI accruals will likely be roughly equal between 2023 and 2024, so no big headwind as we had previously feared. We're extremely excited about the pending full completion and reopening of LaPaya Beach Resort, and the rebuilt property looks fantastic. We'll be having a tour of both LaPaya and -On-Fifth in Naples for investors and sell-side analysts on the Wednesday afternoon following Citi's Reconference in Hollywood, Florida, so feel free to let us know if you'd like to join us, as we'll be transporting folks from the diplomat. LaPaya was on track to deliver the highest EBITDA in our portfolio in 2022 before the hurricane hit, so it's quite important to our future growth. Not only are we excited about LaPaya's operations getting back to normal, but we're also very excited about the significant upside throughout our portfolio following our half a billion dollar plus investment program over the last few years. Whenever we get over this macroeconomic hill related to the Fed's efforts to drive down inflation to its 2% target, we expect to experience a significant upside in our markets over a multiyear period that will be powered by little to no supply growth in our markets, while economic growth drives up travel demand. If we look back to the beginning of the last cycle, and you can see these results in our investor presentation, total EBITDA for today's current portfolio doubled between 2010 and 2015. So in this next cycle, we expect urban and resort supply will be more restricted and slower to be added than in the last cycle. We also believe demand will grow in a healthy and profitable way due to strong economic growth driven by significant technological and medical developments, a massive on-shoring effort in various industries, growth coming from the green energy transition, and positive secular trends related to travel. These positive fundamentals in totality, coupled with a moderating inflation outlook and significant benefits from the completion of our strategic redevelopment program, should lead to very strong bottom line performance for us over an extended number of years. We just need to get over this macro hump. That completes our remarks. We'd now be happy to answer your questions. So Donna, you may proceed with the Q&A.
spk08: Thank you. Ladies and gentlemen, the floor is now open for questions. If you would like to ask a question, please press star 1 on your telephone keypad at this time. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. We do ask that in order to allow as many questions as possible that you please limit yourself to one question. The first question today is coming from Dwayne Fendingworth of Evercore ISI. Please go ahead.
spk12: Hey, thanks for the time. Just on, I'll repeat the question and I know you're maybe a little bit less levered to it, but on the group segment, do you lean on group differently than you did pre-pandemic given changes in underlying seasonality? And maybe John, just broadly, how would you characterize the setup entering 2024 from a visibility perspective? How does this forecasting environment feel versus a, you know, quote unquote, normal time pre-pandemic?
spk11: So I think the question of do we lean on group differently this year versus last year or even pre-pandemic, I'd say it's really driven by each individual property's situation and what's going on in those particular markets. So, you know, give San Francisco, let's look at that as an example, with a softer convention calendar this year, we're leaning on all the other segments, including in-house group, more so than we would in a year where we have, you know, significantly greater convention activity. In a market where the convention activity is up strongly like a market in San Diego, we may lean on group a little bit less than we have in prior years and try to drive those transient customer rates so we can take advantage of the compression, the greater number of compression days in that market. So I don't think there's any general philosophy that's different in 2024, but each market and each property will behave a little bit differently. And then your question about setup, I mean, right now, because Group PACE is so far ahead, I think the setup is pretty good. I mean, we expect to pick up another point and mix of group in the portfolio because of the strength of convention and our in-house group strength that we have compared to last year. And I think as we get into the year, you know, what is the unknowable and the part that's hard to predict is what is short-term group going to look like both, you know, in the month, for the month, in the quarter, for the quarter. I mean, we have probably less group on the books than perhaps other companies. I don't know others. We had about 60%, 62% of our forecasted group on the books heading into the beginning of February. And that's a little bit better than last year as evidenced by the PACE. So I think the setup is good for the year. It's hard to forecast because as we normalize these trends and how much of this group was compared to last year, was it because it was put on the books further out? And therefore, as we saw in some months last year, you know, the short-term pickup was softer than the year before. So that's what makes it hard to forecast. Appreciate the thoughts. Thank you. Thanks, Dwayne.
spk08: Thank you. The next question is coming from Smiths Rose of Citi. Please come ahead.
spk06: Hi. Thank you. I just wanted to ask a little bit maybe just what you're seeing on the transaction side of the market. It seems like that market is being a little bit challenging, but coming out of Alice, there was a lot of talk about how this year would improve significantly and maybe how you're thinking about potentially moving forward with additional asset sales, or are you fairly happy with where the portfolio is now? Oh, go ahead.
spk01: Hey, Smiths. It's Tom Fisher. I would agree with you that I think the sentiment coming out of the Alice conference was pretty positive. I kind of look at it from the perspective that I think 2024 might be a transition year where last year there was a lot of interest, but lack of conviction. This year, I think it's probably transitioning to a lot of interest, but building conviction. And I think part of that is given the fact that I think investors think that the worst is behind them in terms of debt costs and that they can actually underwrite assets and underwrite debt costs and hopefully improving debt costs from that perspective. So I think overall, I think it's become the market's getting better, but it's getting better from a financing front for cash flowing yield assets with strong sponsorship. And so I think you'll continue to see a gravitation towards some smaller deals, which was kind of predominant in 2023. And also those deals that are those assets that are in markets that have recovered as opposed to those markets that are laggard markets are still in recovery because I think both from lenders perspective and investors perspective, it's all about cash flow and debt yield today. And then I think as it relates to our portfolio, I think we're happy with what we've done, but we continue to look at and we would engage in opportunities if it makes sense for us for additional dispositions. And I think that
spk11: the interest in dispositions is really strictly related to being able to generate proceeds that allow us to buy our stock back at such a large discount. So to the extent that the public private arbitrage opportunity goes away, I think our interest in selling assets generally goes away.
spk07: Okay, thank you very much.
spk08: Thank you. The next question is coming from Michael Bellisario of Baird. Please go ahead.
spk03: Morning, everyone. Morning. John, just first quick question on capex and returns. Are you seeing any change in sort of the ramp up of performance post renovation, post repositioning, and then for the projects that have been completed already? Is there any updated view on timing or the timeline of when you think those projects will reach stabilized returns?
spk11: Sure. So, well, the biggest impact to the ramp up was the pandemic. Not surprisingly, for projects that were completed right before the pandemic hit, there were some completed during, quite a number completed during the pandemic. And a few that have now been completed sort of if we're in the post pandemic period, in this post pandemic period. In general, it's probably anywhere from three to five years to ramp to full stabilization. And it really depends upon what are the structural changes? So, the last question is, what are the repositioned flagged properties? So, where we're not, so take the Hilton gas lamp as a good example. It's, you know, one of the best locations, if not the best location in downtown San Diego all around. It hadn't had capital that was in the, it was in the LaSalle portfolio and hadn't had capital invested for almost 15 years. And we did an exhaustive repositioning of that property. And it has some unique aspects, including, you know, I don't know, it's 30 some, 20 some suites and lofts in a separate building from the main building. That will ramp much quicker. And we're already seeing that here in the first quarter even. That'll ramp much quicker than where we take a property like Jekyll Island and we reposition it higher. It's an independent property and it'll just take longer. But ultimately, the repositioning should end up at significantly higher stabilized returns because of the fact that it doesn't have an ADR sort of implied cap by its customer base like a branded property would. So, they tend to take longer on the independent side in general and they're much quicker on the branded side. The other thing that impacts it obviously is the strength of the market. It's a lot easier to gain share in San Diego with the Solomar's conversion to Margaritaville in a market that's strong where demand's increasing and everybody's not fighting over a sort of stable demand level in a market. So, in a market like that, we would expect that to ramp more quickly in the market. So, in general, that's what I would tell you. Obviously, some things that were done years, one or two years before the pandemic, they may not get to our share gains and those double digit returns, but they should get to mid single digit if not higher on a single digit. Cash on cash basis. So, the newer deals with demand already ramping up should see higher returns.
spk03: Got it. Thank you. And just one quick housekeeping item just on the real estate taxes. I think you mentioned $12 million of real estate credits last year as a one-time item, but then when you were talking about margins, you mentioned $9 million of impact. Can you square those two for us? Thanks.
spk11: Yeah, there was GL and there's GL and the $12 million that was mentioned in the script, but you might have just missed it.
spk15: Yeah, it was combined of the two, but I didn't really focus on it or the real estate tax credits of $9 million and we would suggest pulling that out to try to get the run rate in your models because that's more of a run rate because the credits tend to be lumpy and could represent multiple years. So, by taking that out, which is what we discussed in the call, that reduces our run rate of operating expenses by about 100 basis points lower than what was provided in the 2024 outlook. And
spk11: Mike, I think to the other comments we made, we feel pretty positive about significant future assessment reductions and true ups primarily in the West Coast markets, maybe to a lesser extent on the East Coast in a market like D.C., but it just takes time. And part of the reason sometimes the credits tend to be large is it's a multi-year true up of an assessment that we over-accrued and overpaid until we achieve the success in the assessment. And clearly we know values went down dramatically in a number of the markets on the West Coast. And it's just a lengthy process designed to stack the deck in the government's favor. So, being persistent ultimately pays off.
spk03: Understood. Thank you.
spk08: Thank you. The next question is coming from Bill Crow of Raymond James. Please go ahead.
spk14: Hey, good morning all. Two quick questions for me. John, you talked about your expectation that the inbound, outbound travel, international travel deficit will narrow. And I'm curious whether that applies to inbound travel from Asia as well, which seems like it will be much more impactful to the West Coast markets.
spk11: Yeah, Bill, actually we do think it does. And if you look at the data, I think what it shows is you have a significant increase in Asia inbound. It's coming from Korea. It's coming from India. And it's coming from Japan. And those are all three markets where later to begin the recovery as compared to the markets in Europe. And a market like India, many are forecasting, will ultimately replace China from a size perspective given the growth in the economic base and the large population in India. And obviously the better relationship the US has with India versus with China. We have seen significant increase in China. It's just off a very low base right now. So while it used to be clearly in the top five, it's not there right now. But the other markets seem to be picking up much of the slack, but not all of the slack.
spk14: And that's helpful. John, given all the changes to your portfolio, I know the order of importance for contributions to EBITDA has changed pretty dramatically over the last couple of years. Key West is now I think a top five market. I think if you looked at Florida, your four assets there and maybe throw Jekyll in Georgia into that. It seems like a lot of exposure to hurricane prone markets. Are you comfortable with the exposure that you have to that region?
spk11: We are comfortable. It's interesting as we analyze weather impacts and weather risk on a corporate basis through looking at the individual properties. What we find is there are just our weather risks everywhere. They're just different kinds. And some get more media attention than others. But heavy rains and flooding on the East Coast in the Midwest have been pretty consistent over the last few years compared to where they used to be. We've had a lot of heavy rain and flooding fires on the West Coast, although being helped the last year and this year with the heavy rains. But heavy rains on the West Coast, there's a risk from those. We had a tropical storm warning in Southern California we haven't had in 85 years. We had an earthquake in Washington, D.C. There just seem to be weather risks everywhere. And so we're comfortable with what we have in Florida. We think we bought the right properties in Florida. I think the rebuilding of La Playa will help mitigate any future damage based upon the way it's been rebuilt and the effort to mitigate through strengthening the real estate. But I'd say today, yes, we're comfortable with where we stand in Florida.
spk14: I'll
spk11: yield
spk14: the floor.
spk08: Thanks. Thank you. The next question is coming from Dory Keston of Wells Fargo. Please go ahead.
spk09: Thanks. You wind down your ROI projects mid-year. What's a good run rate for capbacks? And how long would you expect to be able to maintain at those lower levels?
spk11: Well, we've significantly redeveloped and comprehensively renovated the vast majority of the portfolio. So we think the run rates likely in the 50 to 60 million dollar range on an annual basis. Our non-major project capital in our 2024 plan is about 40 million dollars. And so that's a little lower given the number of projects that have been redone more recently. We also have been deferring some smaller ROI projects to retain capital in order to use some of that capital to buy back our stock at such a big discount because the returns are higher. So we do think those will ramp up a little bit over time from where this year's other capital is being invested and what the total number is. But yeah, for the next few years, outside of whenever we decide to, we're able to proceed with the conversion of Paradise Point to Margaritaville, we think the capital is going to be, should be in that 50, 60 million dollar range.
spk09: Okay. Have you said what your expectation is for the EBITDA trajectory of the apply over the next several years?
spk11: We haven't. We, as it relates to this year, and that's hard enough to forecast, you know, a reramp from again, from being, from being closed. We're looking at about 22 million dollars of EBITDA give or take as our outlook for this year. That would be in excess of where we were in 19, but well behind the 30, what was it, 35 million we were headed for in 2022 before the hurricane hit at the end of September.
spk09: Okay. And I guess by, you have an expectation of when you should get back to that 35 or not yet?
spk11: We, well that'll depend a lot on the market, depends on how other properties price and perform in that market. And, but the good news, we think it's, you know, whether it gets back there, you know, in general resorts are, our resorts are not at the 22 levels. They've come off a little bit from there. We would expect Naples to, to apply to probably do, do the same thing if it were running stabilized today, but maybe in the next two years. There's, there's certainly a possibility we can get back to the same level or nearby.
spk15: Yeah, Dory, when you look back to Irma, when that hit South Florida, Naples came back as a market quicker than Key West did, as just an indication, which is different demand drivers and customer base in Naples versus Key West. That's another way. A lot
spk11: more annual returnees because of the base population there.
spk08: Okay, thank you. Thank you. The next question is coming from Jay Cornreich of Webber Securities. Please go ahead.
spk05: Hi, good morning. In the fourth quarter, you generally saw a rebound in the urban markets, and I believe you commented on the occupancy gap to 2019 closing to 15%. So I'm just curious that this rebound is coming more from, is this transient customers or group customers and how much growth you foresee in your urban markets in 2024 versus 2023?
spk11: Yeah, so actually the rebounds coming from, from three segments. It's coming from BT. Corporations are getting back to the office. You're seeing obviously significant growth and activity around AI, which is headquartered in San Francisco. The group side is recovering as well. We're going to have a down year on a convention basis in 2024 from prior year cancellations when things were maybe viewed a little more challenging from a quality of life perspective, but that's improved dramatically. I'd say at or better than pre pandemic levels in terms of quality of life and continuing advances in the politics there. So group has been improving, including in-house group and leisure is coming back to the market, both from a domestic perspective and from an international inbound perspective. And I'd say the market segment probably furthest behind continues to be that international inbound because a lot of it came from China in particular, given the population base in San Francisco and the attractiveness of that city from an Asian perspective. So it's really all the segments. We do expect to continue it to continue in 2024 in all segments except for the drop in convention. And we think these other segments should do well to offset that drop in convention. And hopefully we continue to have an up year on a rep our basis in San Francisco. But we do think urban will lead the pack on a rep our basis, our portfolio again in 2024.
spk15: And Jay, when you as relates to San Francisco, when I know there's a lot of talk about the convention calendar in 24 versus 23, which is down, that's primarily in the fourth quarter. Actually, the first half of 24 is up year over year. But what is also up is not really captured in the numbers are all the self-contained groups, which those are groups like JP Morgan that happened in January. That's a self-contained group. It's not a convention numbers. So that's up year over year. So that that part actually is is coming back as the other BTN group is coming back to the city. So when you look at that, you look at those two components, not just the convention demand. And
spk11: you probably hear that from folks like host to who own the big Marriott marquee in town.
spk05: Yeah, absolutely. OK, I'll hold it there. Thank you very much for that time.
spk07: Thanks.
spk08: Thank you. The next question is coming from Danny Assad of Bank of America. Please go ahead.
spk04: Hi, good morning, everybody. John or Ray, can you just if we're looking specifically to the Boston market, you kind of called that out and you're prepared to march. But can you help us break down those 10 points of occupancy gap relative to 2019 in Boston? What is it that I get to recover? Maybe break it down for us by day of week. And then what will drive the incremental occupancy points in Boston from here? I'm just kind of wondering if you're seeing that flatten out or kind of how that trend's been going.
spk11: Sure. I mean, I can give you some general comments. We can follow up with some detail as to this as to the specific segmentation with Boston. We don't happen to have it handy right here. But in general, I'd say it's in it's in two segments primarily. It's in BT, particularly on the large corporate side, including consulting and financial are probably down the most in that market. Those are continuing to recover. You hear probably similar comments about that from the major brands, not only for Boston, but across the country. But it's a big component in that market. That's that's what's down along with some group. The convention, the major convention is actually running similar to some of its strongest years in the past. Where convention is down is at the Heinz Convention Center. And that's because if you recall, there was this hubbub about the prior governor wanting to shut down Heinz and sell it for other uses. And that that sort of potential conversion idea has now passed. The Heinz Convention Center is actively pursuing new business and and which will help drive particularly the back bay to even higher levels, particularly in our portfolio with the Weston, which is attached, the convention center, as well as the revere and the W, which are nearby. So and and they're also planning to do needed renovations over the next few years as they rebuild the group base there. So our in-house group at Weston, as an example, still down a little bit from where we were in 19. And we have that to gain back. And I think that's indicative based upon Marriott's position in the market. It's indicative of other property opportunities as well. So it's really those two segments. I think leisure's been pretty strong. There's probably still some inbound international to go, but it's not a large component. Thank you very much.
spk08: Thank you. The next question is coming from Gregory Miller of Truist Securities. Please go ahead.
spk07: Thank you very much. I'm hoping you can provide some context on the NAD revisions released for February relative to November, given estimated value declines from most of your markets.
spk15: Yeah. So Greg, we look at the gross enterprise value change. It went down about 200 million dollars for our last update. And about half of that, 100 million, are from property sales. That's the sale of ZOE in San Francisco and retail space in Chicago. And then the other half, the hundred million dollars, that's reflective of the asset by asset value estimates that we do internally here based upon what we're seeing in the market. Tom's very close to the transactions in each market to understand where that is, taking into consideration the debt markets and so forth. So that's how we adjusted the 200 million dollar decline. So again, half of it was from asset sales, half of it was the change in value. And then the balance of it is just a reflection of the debt paydowns and then the buying the preferred at a big discount, changing that for the NAD. So overall, the NAD change moved to dollar. But a big portion of that was really just the timing there and some of the adjustments there with the values. And
spk11: Greg, I think when you look at where the values were down, it was primarily markets that were slower to recover, where the debt markets are having a bigger impact on values because those markets lack strong yield and many of the buyers are primarily all equity buyers. So I think as the yields, as the operations continue to recover and yields continue to grow, not only will the values go up because of that, but they'll go up because of sort of the lack of yield penalty being imposed on values by the debt side.
spk15: And that will help transactions in general.
spk07: I appreciate it. Thank you both.
spk08: Thank you. The next question is coming from Floris Van Dijkum of Compass Point. Please go ahead.
spk13: Hey, thanks. Thanks for taking my question, guys. You guys still have this giant gap in profitability, particularly in your urban markets. I calculate something like 96 million shortfall relative to 2019 levels. Maybe, Ray, I mean, I know you've invested in your portfolio. You're going to get some return on that capital. But is there a risk this cycle that your urban markets never fully get back to 2019? Or how do you see that playing out over the next two to three years?
spk15: Well, a couple of factors. One is, as we indicated before, we'll continue to track how and monitor how the changes in business change in business group. Both are going in a good direction. So that's both sides. And that's the growth of that part this year. So that's a positive there. And so that's one. The two is the international inbound component is an impact. If you look at that side, we still have 10 million less international inbound travelers than what we had pre-COVID. And international inbound travelers tend to go to a lot of the coastal markets, the gateway markets, which are the markets we own in. So unfortunately, we did a lot of markets that we are the urban markets were in. We're in those markets that did go down the most following the pandemic. But it does have most of the biggest growth levels coming back now. So it'll go in different periods. So markets like Boston have rebounded quicker, variety, just because the nature of the industry is in Boston. They're benefiting from the trans-European travel there more than the West Coast urban markets are getting penalized because they rely more on Europe as an example. But also you have a lot of the industries in Boston are more coming back to the office. There's more travel industries there. We know the tech side will have been slower in the West Coast. So, yes, overall, we are confident over the next several years. Some markets will get back to pre-19 levels sooner than others like Boston and San Diego. Some that will take longer. But overall, we've seen how travel does follow GDP over the long term. We're just right now in a period now from the pandemic. There's a lot of distortions in the market. But as these normalize with all these demand factors, we think it does get better.
spk13: But,
spk11: Flores, the one thing I had is, you know, are there markets like San Francisco and Portland? Do we think the bottom lines are going to get back to where we were in 19 in the next two or three years? Probably not. I think that would be very unrealistic. Will we dramatically narrow that $96 million EBITDA difference over the next two to three years? Yeah, we think we will from a combination of those kinds of markets recovering with significant operating leverage in them, obviously. And the stronger markets like a Boston and a San Diego, as an example, you know, exceeding 19 levels with strong operating leverage as well. So and all of them with occupancy opportunities, obviously, to regain.
spk13: Thanks, Tony. Actually, that leads me maybe to the connected question here in terms of occupancy upside. I think you mentioned on your prepared remarks that you have about a 15 percent gap in your urban markets. I think it's 13 percent in your overall portfolio. Where do you you clearly express some positive sentiment towards Boston and San Diego in particular? Do you think that to get back to 19 levels, you don't necessarily need to get all of that occupancy back because of the ADR growth, but you think you're going to get back in terms of occupancy in Boston and markets like San Diego as well back to the 2019 levels over the next year or two?
spk11: I think I don't know if we'll get there in the next year or two, but I think we'll narrow that difference pretty substantially in those kinds of markets. And in fact, we may not want to get there. We may want to press more on the rate button in in those markets and and change the mix within the house. You know, running 88 percent in a market like Boston, it's doable, but we'd rather run 85, frankly. And and you know, sometimes you have to take the occupancy. You can't get it in rate. But but yes, I think we'll we'll narrow them dramatically. But do we do we think we're going to get there? I mean, tell me what the economic world is going to be also over the next two or three years, because I think if we get past this hill this year, I think we're in really good condition to drive both occupancy and rate.
spk13: Thanks, John. That's it for me.
spk08: Thank you. Our final question today is coming from Chris Darling of Green Street. Please go ahead.
spk11: Chris, it better be a good one. You're the clean up here.
spk02: Well, thanks. Hopefully so. But I want to go back to the discussion around your NAV estimate. I'm just wondering, you know, if lower values in some of these urban markets, are they does that make you more likely to hold some of these assets rather than to sell at the press values, especially as you're expecting, you know, some fundamental upside in the near term? So just wondering how you're thinking about that.
spk11: I think I think selling in those markets would would likely bring our growth rate down a little bit on a marginal basis. But the investment of the proceeds from them into the rest of our portfolio through buying back our stock, as long as that remains exceedingly attractive, I think it does still make sense. As you know, I mean, the public markets tend to not look three or four years out as it relates to lodging rates or frankly most companies. In that case, values not is not the popular form of investing. It's really growth. And while that would impact our growth rate a little bit, I don't I don't think at the margin it's as attractive to hold as it is to sell and buy our stock back. I mean, where we've been selling has generally been the slower to recover markets and the lower quality assets in those markets. So we've been improving the overall quality of the portfolio. At the same time, we've been buying the remaining part of the portfolio back at a big discount. So I don't think it would change our view of where we've been focused.
spk02: All right. That's helpful to hear. And then just one more for you on Schemenia. Just hoping you can elaborate on what exactly is being done with the initial twenty million dollar investment. And then as you densify that property over time with these alternative lodging units, I'm just curious to understand if there's upside in terms of operational efficiencies that you can realize.
spk11: Sure. So we have we have Schemenia sits on 200 acres. We had a golf course that took up about 100 acres and we closed it several years ago and we rebuilt on it a nine hole par three in a sustainable way and an 18 hole putting course adjacent to it. And then we freed up, I think, about 70 acres of it along with the additional land we had for future development. This this twenty million dollar investment went for a two and a half million dollar pavilion that we built adjacent to the 18 hole putting course for events and and some for weddings. We added three more tree houses to the six we already had. So we now have nine and we're experimenting with some additional new alternative products. We're we're completing five luxury glamping units on on a portion of the property. We're adding a three bedroom villa and we're adding two two bedroom cabins and those will have longer length of stay, perhaps weekly, in some cases, perhaps monthly. Whereas the tree houses are much more nightly like the rest of the lodge. And then in order at this point to really do it right, we've we've brought through the property or at least through a portion of the property, which would we brought through utilities, road and infrastructure. So gas, electricity, water, sewer and and roads for access to about a third of the of the excess acres. So we can build significantly a greater number of alternative lodging units. We're looking at things like a luxury RV park. We're looking at a farmhouse in with vineyards and and and fruit fields. I mean, there's a there's a bunch of different things we're looking at. But right now we're just experimenting with, you know, what is the customer have an interest in in this market and what are they willing and what are they willing to pay for that? And so it's similar to what we did with the original couple of tree houses that we built. Will there are there operating efficiencies? Yeah, they're they're significant. I mean, we're not adding anything other than hourlies at this point in time as we add these additional units. If we add a different concept like a farmhouse in or something, you know, we may or may not use the same team at the property. But ultimately, a lot of the expansion of the units and these units run two times or more of what the average lodge rate is. So they're significantly more profitable on a per key basis or per bedroom basis as it relates to the cabins in the villa. So there's a lot of operating leverage for these additional units. But right now it's not a huge number of units. It's really sort of a test sort of a test case.
spk15: And Chris, just to give you some sense of the development of that, Skamania, and we love it because all the additional amenities we can add. So it's it's more than just a lodge. There's a lot of things to do there. When we acquired that hotel, they had about four point four million of EBITDA. It ended twenty three and almost thirteen million dollars of EBITDA. And the occupancy is still below where we were pre pandemic. So just to show you that the by adding all these additional services, do we think it's maxed out? No, there's plenty of growth opportunities there. And with additional units we can add between the glamping and other alternative for this, we think there's a lot more growth in there. So it's been a great investment for us. We look forward to that.
spk02: All right. Well, thanks. Sounds like a lot of interesting things over time there. So appreciate it.
spk11: Yep. Thank you, Chris.
spk08: Thank you. At this time, I'd like to turn the floor back over to Mr. Boertz for closing comments.
spk11: Well, thanks, everybody, for participating. We'll see you many of you down in in Florida. We hope you can join us for our Naples tour and otherwise we'll we'll be in touch with you in April again to report first quarter results. Thank you very much.
spk08: Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day. Thank you.
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