Pebblebrook Hotel

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

Thank you, Donna. Good morning, everyone. Welcome to our second quarter 2024 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. Before we begin, please note today's comments are effective only for today, July 25th, 2024, and our comments may include forward-looking statements as defined under federal securities laws, and actual results could differ materially from those discussed today. For a comprehensive analysis of potential risk, please consult our most recent SEC filings and visit our website for additional details and reconciliations of any non-GAAP financial measures we use. Now let's move on to our second quarter results. We are pleased to share that our second quarter bottom line financial results well exceeded our outlook. Overall, hotel demand met our expectations, driven by healthy corporate group, business transient, and solid leisure demand across most of our urban markets and resorts. Our newly redeveloped and repositioned properties are also performing well, capturing market share and improving cash flows, in-line or exceeding our ramp-up expectations. Our Q2 RepR increased by 1.7% and total RepR rose by 2.5%, both of which were in the middle of our 2Q outlook range. Our efficiency and cost-saving initiatives were more than offset inflationary cost pressures. With slightly better-than-expected property tax reductions, our intense focus on operating efficiencies led to lower year-over-year operating expenses, substantially boosting hotel profitability. As a result, our same-property hotel EBITDA exceeded the midpoint of our Q2 outlook by a range of $5.2 million and topped the high end of our outlook by $2.7 million. Adjusted EBITDA and adjusted FFO also benefited from higher than expected business interruption proceeds related to La Playa, further enhancing our positive Q2 performance. We exceeded the midpoint of our Q2 outlook for adjusted EBITDA and FFO by $10 million and at the top end by $7.5 million. Adjusted FFO per share performed our midpoint by 8 cents and exceeded the top of our Q2 outlook by 6 cents. Additionally, we are raising our 2024 full-year outlook for same-property hotel EBITDA, adjusted EBITDA, and FFO, which John will elaborate on later in the call. Our urban markets continue to recover, with San Diego catching the biggest wave, bolstered by a robust convention calendar, good weather, and a ramp-up of our recent property redevelopments. Our San Diego properties improved occupancy by 9 percentage points over the second quarter of 2023, rising to 81%. Recently, repositioned properties, Margaritaville Hotel's San Diego Gaslamp Quarter and Hilton's San Diego Gaslamp Quarter propelled our Q2 San Diego Repar growth to an impressive 22.4%. Riding this wave of success, Chaminade Resort and Spa in Santa Cruz generated an almost 25% improvement in Repar, while Estancia La Jolla Hotel and Spa's Repar increased over 28%. This epic performance from many of our coastal California properties inspired this quarter's classic surfing song from the Beach Boys. Our other urban markets achieving healthy occupancy gains included Chicago, Boston, and Washington, DC. Underperforming urban markets in 2Q, which impacted our urban recovery, were Portland, LA, and San Francisco. Overall, our urban properties increased occupancy by 2.5 percentage points driven by solid growth in corporate group and transient demand, along with enhanced leisure bookings through expanded demand channels. We gained more demand through consortia demand channels such as American Express, Capital One, and Costco, as well as both domestic and international wholesale channels, albeit at slightly lower average rates. Urban weekday occupancies climbed by approximately 3 percentage points, while weekend occupancy grew by 1.4 percentage points in the second quarter. RAF PAR at our urban properties increased 2.6%, while total rent part rose by 3.4%. Turning to our resort properties, we observed encouraging improvements in demand compared to the same quarter last year. Resort occupancy increased by 3.5 percentage points, driven by strong weekday demand growth from both corporate groups and rising weekend occupancy rates from leisure travelers. Weekday occupancy at our resorts improved by 3.2 percentage points, while weekend occupancy grew by 4.3%. six percentage points in the second quarter. Overall, resort rep part declined by 0.7%, primarily due to a 5.4% decrease in ADR. Although ADRs at resorts have continued to normalize, part of this decline is attributable to changes in segmentation. We've observed increased weekday demand from corporate groups, which is lower priced than our average transient rates. Additionally, we've added leisure occupancies from wholesale accounts and other discount channels. While these segments yield lower ADRs compared with the direct booking segments, corporate groups and consortia generate healthy levels of out-of-room spending. This contributed to the growth in total rep are at a resort properties, which improved by 0.6%. Despite the moderation in ADRs, our resorts have maintained a significant 30% premium rates compared to 2019. The increase in demand from discount channels indicates that some leisure travelers, while still traveling, are becoming more price sensitive and seeking deals and bargains. The shift in customer behavior is one of the reasons we have adopted a more cautious top-line outlook for the second half of the year. Regarding our segmentation in Q2, group demand increased by 2.4% over the same period last year, representing approximately 27% of our customer mix. This growth was primarily driven by a notable 11% rise in corporate group demand compared to the previous year. Group revenues saw a 4% increase. Transit demand also strengthened with a 4.4% uptake over last year, supported by gains from OTAs, consortia, domestic and international wholesale, and airline crew bookings. On a monthly basis, same-property repertoire experienced a 2.2% decline in April, mainly due to the holiday shift and major conventions movement from April last year to May this year. The shift contributed to the substantial 6.9% repertoire increase in May. June saw a modest rise of 0.4%, which was softer than we anticipated back in April. Early June was adversely affected by severe weather in southern Florida, leading to increased cancellations and reduced bookings at our Florida resorts. Additionally, the Juneteenth holiday falling on a Wednesday this year, as opposed to Monday last year, negatively impacted both business and leisure demand for the week. Two properties not included in our same property hotel EBITDA Newport Harbor Island Resort and La Playa in Naples delivered positive financial results for the quarter. Newport Harbor, which opened in late April, is being well received by guests and exceeded their expectations, generating $1.6 million in EBITDA. La Playa's performance was in line with expectations, producing $7 million of EBITDA. Encouragingly, La Playa has generated $15.3 million of EBITDA year-to-date, compared to a loss of $3.7 million over the same period last year. Due to the resort's positive momentum, we expect La Playa to contribute $24 million of EBITDA for the year, an increase of $2 million from our prior outlook. Additionally, we are increasing our 2024 BI estimate for La Playa by $3 million due to the better-than-expected progress with our insurance claim. These improved results have incorporated into our increased 2024 outlook. Our focus efficiency and cost reduction initiatives across all operating departments significantly bolstered our positive same property EBITDA results. These efforts led to a hotel EBITDA margin of 31.5% in Q2, a 180 basis point improvement from the prior year quarter. The departmental expenses increased by just 2%, and undistributed expenses rose by only 2.9%, despite an almost 13% increase in energy costs. Gross operating profit before fixed expenses rose by 3%, and on a per-occupied room basis, total operating expenses declined by 3.8%, and calculated before fixed expenses, they declined by 1.5%. This demonstrates our ongoing successful efforts to combat inflationary pressures through efficiency enhancements as we highlighted last quarter. We put all of our operating processes and expenditures under a microscope benchmarking every line item throughout the portfolio. These strategies are part of a broader initiative to offset above inflationary cost increases in wages, benefits, energy, and insurance across our portfolio. And speaking of insurance, we achieved a favorable outcome with our recent property and casualty insurance renewal completed on June 1st. Overall, premiums will increase by about 5% compared to our expiring program. Notably, our insurance rates declined by approximately 1%, indicating improvements in the overall insurance market. We increased our insurable values by about 6% to reflect our estimates of higher replacement costs, and we've maintained the same overall total insurance coverage with no significant changes in premiums or other business terms. Turning to our $520 million strategic reinvestment program, we completed several major capital investments this quarter. The $50 million transformation of Newport Harbor Island Resort into a premier New England resort luxury destination was completed and fully launched on Memorial Day weekend, partially after opening it at the end of April. And Estancia La Jolla Hotel and Spa's $26 million multi-phase redevelopment was completed in mid-April, receiving excellent reviews from existing customers and attracting new demand. And finally, at Skamania Lodge, we finished a $20 million first-phase redevelopment, introducing eight new alternative lodging combinations, including two cabins, a three-bedroom villa, and five unique glamping units, all of which are booking up well over the busy summer period. We are excited to have a completely refreshed and redeveloped portfolio moving forward, and we expect these properties to continue to gain market share and drive cash and cash returns over the coming years. In our earnings release last night, we announced the upcoming conversion of La Meridian Delfina Santa Monica into Hyatt Centric Delfina Santa Monica, scheduled for mid-September of this year. The property will undergo an approximately $16 million refresh, with the majority of costs offset by key money provided by Hyatt. The refresh, which primarily involves soft goods and FFD replacements, will commence in the fourth quarter of this year, and we expect it to be completed in the second quarter of 2025. The hotel will continue to be managed by Highgate, who also manages our Viceroy Santa Monica property in the same market, so we don't anticipate any notable disruptions from the flag change or renovations. We are very excited about this flag change, and we will only have the only high-brand family property in the highly desirable Santa Monica Marina del Rey market, compared to the seven competitors we currently have within the Marriott brand family. And overall, we remain on track to invest $85 to $90 million in CapEx for the year, net of the high key money. Regarding our balance sheet, we remain in good shape, with overall $110 million of cash on June 30th, and no significant debt matures until October 2025, thanks to the successful refinancing earlier this year. The weighted average cost of our debt is now an attractive 4.4%, with 75% currently at fixed rates, and 71% of our debt is unsecured. For that comprehensive update, I'd like to turn the call over to John. John?

Thanks, Ray. As Ray indicated, we're very pleased with our overall performance in the second quarter. We successfully implemented many operating efficiencies across our portfolio, driving better than forecast and substantially improved year-over-year bottom line results. Our top line revenue growth was in the middle of our outlook range, yet we exceeded the midpoint of our outlook for same property hotel EBITDA by $5.2 million and adjusted EBITDA and FFO by $10 million. These operating efficiencies are not one-time cost reductions. They're ongoing and should help mitigate future inflationary cost pressures. When we look at the industry results overall in the second quarter, while we're encouraged by overall industry demand turning positive for the quarter, we're increasingly concerned about gradually slowing ADR growth and a slowing economy. The Fed continues to keep its foot on the brake and it's clearly showing up in weakening employment growth, increasing unemployment, slowing consumer spending, increasingly restrictive interest rates, and a more cost-conscious consumer. As a result, we're a little more cautious about REVPAR growth for the second half of this year, particularly ADR growth. As Ray indicated, business travel continues to recover, both group and transient. Leisure demand remains healthy, and we certainly saw substantial increases in our portfolio, but leisure demand across the industry remained generally flat. Weekday pricing edged higher in our urban portfolio, while our weekend pricing at both our urban hotels and resorts suffered as we added occupancy at lower rates and as the leisure customer has become more price conscious. In our portfolio, we expect further year-over-year occupancy growth in the third quarter, as well as continued pressure on our average rates. As a result of this continuing leakage in ADR, which earlier this year we had thought would reverse and turn positive in the second half of the year, we're lowering our REVPAR outlook to 1.25 to 2.25 percent for the year, with all growth stemming from increased occupancy. Despite this adjustment, we still expect healthy growth in total revenues driven by strong out-of-room spend from increased occupancy and the benefits of our significant re-merchandising efforts across our redeveloped portfolio. Additionally, our successful efforts to create operating efficiencies, achieve real estate tax reductions, and manage a lower increase in property and casualty insurance allow us to increase our 2024 outlook for hotel EBITDA, adjusted EBITDA, and adjusted FFO and AFFO per share. We're not forecasting any additional material reductions or credits in real estate taxes for the remainder of the year. However, we do continue to expect substantial additional prior and current year reductions over the next several years. We just don't know when these efforts will deliver these benefits given the uncertain timing of the governmental process. For Q3, we're forecasting REVPAR growth in the range of one and a quarter to three and a quarter percent, driven entirely by occupancy growth. We're forecasting total revenues to rise by 1.7% to 3.8% and total expenses to increase by 3.9% to 4.9%. Our urban properties are expected to lead this REVPAR growth, although San Francisco will be a drag due to a challenging convention calendar compared to last year, and Los Angeles seems to be recovering more slowly from last year's strikes than anticipated. Our properties in San Diego, Boston, and Washington, DC should again lead our urban market performance with strong growth expected in Chicago with a robust convention calendar for the quarter and the Democratic National Convention in August. Our resorts should see flat to modest growth in Q3. Our recently redeveloped properties, including Margaritaville San Diego Gaslamp Quarter, Hilton San Diego Gaslamp Quarter, Estancia La Jolla Hotel and Spa, Jekyll Island Club Resort, Newport Harbor Island Resort, and Chaminade Resort and Spa should all help drive our performance in the third quarter. We expect July to be our weakest month in the quarter. However, August should benefit from an early Labor Day, with the holiday weekend starting in August. Both August and September should be good months, with September benefiting from the early Labor Day, which will have less impact on business travel in September and the Jewish holidays falling entirely in October. Our total pace for Q3 supports our positive outlook. Total group and transient revenue pace is ahead by 6%, driven by a healthy 8.3% increase in room nights compared to the same time last year, although this is offset by a 2.1% decline in ADR. Group demand is leading the quarter's pace advantage, with group room nights up by 12.4%, ADR ahead by 2.8%, and group revenues pacing a strong 15.6% over same time last year. Transient revenue pace is up by just 1.1%, with room nights increasing by 5.9%, but ADR lower by 4.6%. In formulating our Q3 RevPar outlook, we expect that in-the-quarter, for-the-quarter pickup will be lower than last year, given the ongoing normalization of the booking window to pre-pandemic timing. We're particularly encouraged about our pace for 2025. Group room nights are ahead by 4.6%, compared with the same time last year, with ADR 3.5% higher and group revenues increasing by 8.3%. Q1 is currently showing by far the strongest quarterly pace advantage. Our recently redeveloped properties should help drive growth in 2025 as they continue to gain market share and ramp up. Additionally, our urban markets should also continue to recover, and we expect Portland, San Francisco, and Los Angeles, our three underperforming urban markets in 2024, to provide a positive tailwind in 2025. Our healthy group pace advantage for 2025 is partly due to favorable convention calendars again next year in most of our markets. as well as strong in-house group business at many of our larger group properties, such as Westin Copley, Paradise Point Resort, and Margaritaville Hollywood Beach Resort. Our many redeveloped properties should also provide a strong boost to our performance next year. Coupled with a favorable economic environment and little new supply for many years in our urban and resort markets, We're very optimistic that a soft landing engineered by the Fed, if successful, will lead to a very positive year for our industry and our company next year. It certainly feels like we're on the brink of commencing a very positive upcycle for our industry and for Pebble Brook. And people continue to want to spend on experiences and having fun, so Pebble Brook is well positioned to continue to take advantage of that favorable secular trend. So that completes our prepared remarks. Operator, you may proceed with the Q&A.