Pebblebrook Hotel

Greetings and welcome to Pebble Brook Hotel Trust Third Quarter Earnings Conference Call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If anyone requires 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.

Thank you, Donna. And good morning, everyone. Welcome to our third 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 that today's comments are effective only for today, November 8, 2024. 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 filing and visit our website for detailed reconciliations of any non-GAAP financial measures mentioned today. Okay, we have a lot to cover today, so let's move to our third quarter results. We are pleased to report that despite the negative impact of two named storms on several properties this quarter, our third quarter hotel operating results were in line with our outlook. Repar growth driven by occupancy increases at both our urban and resort properties, market share recovery, and gains in many of our recently redeveloped properties. The ongoing recovery of business group and transient demand, along with strong resort and urban weekend leisure travel, fueled our occupancy gains, even as the broader industry experienced a continued normalizing of leisure travel trends. In the third quarter, same property rep bar increased by 2.2%, landing squarely in the middle of our outlook range, and would have exceeded 2.4%, if not for the impact of the hurricanes. Our outperformance significantly outpaced the industry's REPAR growth of 0.9% and the 0.5% gain in our specific market, highlighting our portfolio's success in growing market share. This growth is largely driven by our recently redeveloped and renovated properties and the strong recovery of our urban markets. Total REPAR rose by 2.7%, propelled by increased occupancy and strong out-of-room spending, which grew 3.8%. These positive trends more than offset the approximate 30 basis point negative impact from the storm. Our same property, Hotel Ibida, reached $110.8 million comfortably in the middle of our outlook range, even after absorbing an approximate $1.2 million negative impact from the two named storms. It is important to note that while La Playa was the most significantly affected property by the storms, is excluded from our same property reporting due to its restoration following Hurricane Ian. We're also pleased to report that adjusted EBITDA exceeded the midpoint of our Q3 outlook by $8.7 million and surpassed the top end by $6.2 million. Adjusted FFO beat the midpoint of our outlook by $9.7 million, or $0.08 per share, despite an estimated $1.5 million negative impact from Hurricanes Debbie and Helene. This outperformance was largely due to $7.1 million in business interruption proceeds related to the supply from Hurricane Ian, which we hadn't factored into our prior Q3 guidance. We had previously anticipated $2.7 million in BI proceeds in the fourth quarter, which we no longer expect. Our strongest urban markets in third quarter were Chicago, San Diego, and Boston. These cities benefited from active convention calendars, improved weekday business travel, and the ongoing return of leisure demand. Additionally, our urban Portland properties showed a promising 18% increase in occupancy compared to the same quarter last year. We're optimistic that this represents the beginning of sustainable recovery in this late-to-recover market. Our urban properties' occupancy increased by 3.7% year-over-year in Q3. Urban weekend occupancy rose by 3.9%, exceeding 85%, also by a sustained return of leisure travel to cities. Urban weekday occupancy grew by 3.8% year-over-year, 77.8%, reflecting continued healthy recovery in group and transient business demand and a strong convention calendar in a number of our markets. Out-of-room spending remained healthy, resulting in a 2.7% increase in urban total rep parts. demand that all of our southeast properties were impacted by Hurricane Debbie in early August, and more significantly, the Hurricane Helene in late September. While the Playa Beach report in April has seen a modest physical damage, it's important to note that storms historically lead to cancellations and reduced bookings both before and after they hit, which explains the broader impact on our southeast properties. In a resort segment specifically, despite the impact of the named storms, Same property occupancy climbed by 5.9% year-over-year, reaching 74.3%. Resort weekday occupancy improved by 6.7%, and resort weekday occupancy grew by 5.2%. These are very encouraging trends that highlight the benefits of our significant capital reinvestments, making our properties more appealing to both group and leisure travelers and allowing us to gain meaningful market share. A key driver of our resort's weekday occupancy growth was the over 10% increase in group demand, led by surge in business group segments specifically. While business group demand at a resort typically comes at a lower ADR than weekend leisure bookings, potentially given the impression of declining property ADRs, the business group segment generates substantial out-of-room revenue, particularly in food and beverage. and frequently drives more total revenue and EBITDA per occupied room than transient segments. For example, in Q3, our same property resort ADR declined by 4.8% compared to the prior year period, primarily due to a higher mix of business group booking. Excluding business group, our resort ADR declined by only 1.9%, highlighting the impact of demand mixes on ADR, specifically higher portion business group in this case. This also reflects the normalization of leisure weekend ADR, which appears to be stabilizing. Strong demand for business groups and the resulting shift in their customer mix contributed to an overall increase in same property resort total REPR of 2.5%, significantly higher than the 0.8% increase in same property resort REPR alone. Across our total same property portfolio in the third quarter, group nights grew by 9.1% year-over-year, with ADR increasing 1.9%, driving a total group revenue increase of 11.2%. Group revenue accounted for about 24% of total room revenue in the quarter. Transit demand also strengthening, with room nights up 2.8% year-to-year across the portfolio, though transit revenue remained roughly flat. This growth was supported by higher bookings through consortia partnerships with firms like Capital One and American Express as well as improving demand from international wholesale markets. However, international inbound demand still remains well below pre-pandemic levels. Turning to profitability, our intense focus on efficiency and cost reduction across all departments continue to yield positive results. Total same-property hotel expenses before fixed expenses, such as real estate taxes and insurance costs, increased by 3.2%, while same-property occupancy grew by 4.2%. This means we're able to decrease costs for occupied room again in the third quarter. Year to date, total same property hotel expenses have increased by just 2.7%, with occupancy up 3.7%. Our aggressive approach to efficiency and best practices has effectively mitigated inflationary pressures, including wages and benefits. These continuous and relentless efforts position us well to manage anticipated wage and benefit cost pressures in 2025 and beyond. Regarding capital investments, we rebranded our Delfina Santa Monica Hotel as a Hyatt-centric on September 18th, with a $16 million property refresh already underway and expected to be completed in the first quarter of next year. The brand transition temporarily disrupted property performance in September, and we expect this impact to continue significantly into Q4. However, As we realign customer awareness and marketing programs with the new Hyatt brand, we believe this integration will drive a strong rebound once fully embedded into the Hyatt system. Instead of the key money provided by Hyatt, we expect to invest 90 to 95 million in capital projects across our portfolio this year. Over the last several years, we have completed major redevelopment and repositioning of nearly all of our properties. We've invested hundreds of millions of dollars to dramatically enhance our portfolio's quality, elevate properties market position while we've already made substantial investments the majority of the upside remains to be realized we're already seeing incremental returns from these investments with many of our recently redeveloped properties outperforming during the quarter and year today we expect this positive momentum to continue as these properties further ramp up their performance now that our major capital investment program is largely complete were poised for significantly lower capex over the next few years. Moving on to the restoration of La Playa, as we detailed in our Hurricane Milton press release last week, the resort experienced property damage from Hurricane Helene on September 26th and from Milton on October 9th. The damage was primarily due to storm surge. Water and sand intrusion affected approximately 20 ground floor guest rooms in a 79-room beach house building. and the pool's resort complex, the resort's pool complex. Fortunately, the majority of the resort, including the Gulf Tower and Bay Tower, which together house 110 guest rooms, sustained minimal damage. Our previous capital investments in La Playa and our other southeast properties have significantly enhanced their storm resilience, minimizing damage and reducing the time needed to restore operations ever after such events. And we're pleased to report that the Gulf Tower and Bay Tower fully reopened on November 1st. After being closed, we first evacuated and closed the day before Hurricane Milton hit Florida on October 9th. Thanks to our team's extensive preparation efforts, including positioning a third-party remediation team nearby, we were able to begin cleanup and repairs immediately after the storm. We are targeting to reopen our pools between now and the end of the year as soon as the new pool equipment arrives. We're also targeting to reopen the upper floors of the beach house in the next few months and complete ground floor guest rooms by the end of the first quarter of next year. Our ability to achieve these targets is based upon receiving all necessary governmental approvals in a timely manner and avoiding supply chain delays for construction materials and FF&E. The cost of these repairs and restoration work will be covered by insurance after deductibles. Turning to our revised outlook for the fourth quarter in 2024, we estimate that the combined impact of Hurricane Helene and Milton will reduce Q4 same-property REPAR by approximately 100 basis points, resulting in a $2.5 million decrease in same-property hotel EBITDA. Please note that these same-property numbers exclude La Playa, which was not part of our same-property reporting this year. When we include and apply it, we estimate the total negative impact in Q4 from the two hurricanes to be about $10 million on adjusted FFO and adjusted EBITDA, with apply accounting for $7.5 million of this amount. We also estimate that the high-centred brand transition will reduce our Q4 REFAR by approximately 100 basis points, leading to a $1.4 million reduction in same-property hotel EBITDA. So, if not for the weather and rebranding impacts, our Q4 RELPAR outlook would be 1% to 3% up. The remaining $3 million reduction in our Q4 same-property EBITDA outlook is attributed to slightly weaker-than-expected transit demand in several urban markets, including LA, San Francisco, Austin, and Washington, D.C. Most of this softness seems to stem from a weaker final week of October and the first week of November, as the election appears to have had a more significant impact on travel than previous presidential elections. Shifting out to our balance sheet, we've actively worked on to strengthen our financial position and extend our debt maturities. On October 3rd, we successfully completed our inaugural issuance of $400 million of attractively priced 6.378 senior unsecured notes maturing in 2029. We used these proceeds to significantly reduce our 2024 25 and 27 bank term loans. Additionally, on November 4th, we announced the extension of the vast majority of our remaining 2025 bank term loan to 2029. We also extended the majority of about $600 million of our $650 million unsecured credit facility from 2027 to 2029. As a result of these refinancing efforts, we have no significant debt maturities until December 2026, and our debt is well-structured with a weighted average interest rate of just 4.3%. And finally, as the hotel industry and our portfolio continues to normalize, we made the decision to discontinue the monthly operating update we started during the pandemic. We initiated these updates during the pandemic to provide timely information to our shareholders during a period of significant uncertainty and rapid change. Stepping back from these monthly updates signals our confidence in the improved stability of both the industry and our portfolios. And with that comprehensive update, I'd like to turn the call over to John to provide more details on hotel operating results and their expectations for the future. John?

Thanks, Ray. I thought I'd start with a simple evaluation of the industry's performance, provide some further insight on our performance, briefly highlight some of the significant share gains from our redeveloped properties, and then provide some high-level thoughts on 2025 for both the industry and for Pebble Brook. So let's start with the industry. In Q3, business group demand continued to grow and business transient demand continued to recover as return to office patterns improved. Leisure demand was a little more complicated. While overall leisure demand remained healthy, it was roughly flat year over year. This was partly due to international outbound travel, goosed by the Olympics in Paris, outpacing the inbound recovery following the pandemic. In addition, the return of leisure demand to the cities, particularly the coastal cities that suffered most during the pandemic, has negatively impacted overall industry resort demand as historical demand patterns normalized. We also continue to see a noticeable difference in demand across price segments, with stronger performance at the upper end compared to the mid to lower price segments. We've talked about this before. We believe this is largely due to economic pressures impacting individuals in lower income brackets, where pandemic-related governmental support has largely phased out, personal savings have diminished, and high credit card interest rates, along with inflation, have created added financial strain. The STR data reflects these challenges, and we've heard similar comments from companies in many other industries. Encouragingly, employment remains strong, and wage increases in this lower income group are solidly outpacing inflation, which should provide support for a better 2025. The unusual aspect of the hotel industry this year, at least from our perspective, is that demand has remained flat despite healthy GDP growth, a trend persisting since April of last year. This suggests that demand patterns changed significantly during and after the pandemic and have been normalizing over the last 18 months. We believe most of this normalization has now occurred and is winding down positioning the industry favorably for 2025. Assuming continued healthy economic growth, as most economists are forecasting, we expect demand growth in 2025 to better align with GDP growth. With supply remaining extremely limited, this should result in healthy occupancy growth next year. For Pebble Brook, as evidenced by our three Q and year-to-date results, We're not following the industry's flat demand performance thanks to several factors. First, our properties are all positioned in the upper upscale or luxury segments, making them much less impacted by the challenges faced by travelers in more price-sensitive segments. Second, a significant portion of our portfolio resides in the urban markets that continue to regain significant occupancy, with leisure and business transit demand returning and group bookings growing. Third, we're also regaining occupancy that was previously displaced by last year's renovations and redevelopments. And fourth, we're gaining market share in most of the properties we've redeveloped over the past few years. However, we face certain market headwinds all year, including in the third quarter, that are negatively impacting our performance. Three urban markets, San Francisco, Los Angeles, and Portland, all took a step backward this year, each for different reasons. San Francisco experienced a significant decline in convention business this year, negatively affecting occupancy, but even more so putting pressure on rates. Encouragingly, This demand drop was more than offset by increases in business transit, in-house business group, and recovering leisure travelers to the city. Convention calendar is expected to strengthen significantly next year, up 50%, and it's currently trending to be in better shape in future years. Los Angeles and Portland have had different headwinds. L.A. faced significant reductions in demand due to the entertainment industry strikes last year and the potential for a strike this past summer. We're seeing production begin to return, albeit gradually, and we're encouraged that this trend should accelerate as the governor just announced a doubling of entertainment production financial incentives next year. Portland's recovery has been slower due primarily to quality of life challenges that were exacerbated during the pandemic. However, there have been noticeable improvements recently as local policies have been implemented to promote a safer and cleaner city. As Ray indicated, we've seen a significant recovery in Portland's business demand this year, particularly in Q3, and we expect 2024 will represent the market's bottom with a more robust recovery ahead. The combined rev par for these three urban markets declined 5.7% in the third quarter, and we're forecasting a decline of 5.6% for the full year. Combined, these three markets present a year-over-year EBITDA decline of over $17 million for this year. In contrast, Our urban properties in Boston, San Diego, and Chicago grew combined rev par by 9.6% in the third quarter, and they're forecasted to achieve 8.1% growth for the full year. Combined EBITDA from these three markets is currently forecasted to increase by $15.5 million this year. So quite a contrast between the faster-recovering cities and the slower recovering cities. We anticipate that these three slower and later to recover urban markets should no longer be a drag on our performance in 2025 and should even become a tailwind next year and beyond. In addition, we expect significant further benefits from our recently redeveloped properties throughout our portfolio, which have achieved substantial market share gains in 2024. And let me provide a few examples. We previously talked about the redevelopment and conversion of Hotel Vitale in San Francisco into the One Hotel San Francisco. In a very challenging market, which generally makes it harder to gain share, One Hotel San Francisco gained another 765 basis points of REVPAR share year over year in the third quarter. and it's gained over 1,000 basis points here today. This is on top of last year's 2,400 basis point gain. Margaritaville-San Diego Gas Plan Quarter gained over 2,600 basis points in the third quarter and over 3,600 basis points here today. Newport Harbor Island Resort gained over 400 basis points of RevPAR in Justin's first full quarter of being open, following its redevelopment. Stancia La Jolla Hotel and Spa gained over 400 basis points in Q3 and over a thousand basis points year to date. Properties redeveloped in prior years are also showing strong gains as ramp up typically takes three to four years and was interrupted by the pandemic. Lobert's Del Mar gained almost 700 basis points of rev par share this year so far. Harbor Court in San Francisco has gained over 1,000 basis points this year. Chaminade Resort in Santa Cruz gained over 600 basis points year to date. Viceroy Santa Monica and Hotel Zena in Washington, D.C. each gained over 400 basis points. Ziggy in West Hollywood gained over 300 basis points. Weston Copley in Boston gained over 800 basis points. I could go on, but I think you get the idea. Continuing RevPAR share gains from all of our major redevelopments will drive significant RevPAR growth and EBITDA gains over the next few years, particularly with limited to no supply growth in our markets. Looking forward to 2025, Group pace for our portfolio continues to be very favorable. Group room nights are currently ahead by 6.2% year over year, with ADR up by 2.2%, and total group revenue on the books up by 8.5% compared to the same time last year. And combined with transient, total room nights on the books for next year are ahead by 12.2%, with rate up by 0.1% and total revenue on the books ahead by 12.3%. We're particularly encouraged by next year's group pace at our resorts. They're currently ahead by 11.2% in group room nights, 2.7% in ADR, and 14.2% in group revenue. Our redeveloped resorts are leading the way to this favorable pace. As we look out to 2025, we see several very significant positives. First, we expect headwinds turning into tailwinds in our three challenging urban markets, with our other urban markets set up for continuing growth in 2025. Second, we expect significant growth from ongoing share gains in our redeveloped properties. we believe the recovery in business transient and business group will continue. Fourth, we expect the trend of leisure travelers returning to the cities will continue next year, and international inbound versus outbound should begin to become a tailwind, further benefiting the urban markets. And fifth, we believe it's likely that overall hotel industry demand growth will return to its normal historical relationship with GDP growth, leading to higher occupancies as demand growth outpaces a very low level of supply growth. Of course, all of this assumes a relatively normal year of economic growth, but it's consistent with the current consensus forecast. So that completes our prepared remarks. We're now happy to address your questions. So Donna, you may proceed with the Q&A.