Pebblebrook Hotel

Greetings and welcome to the Pebble Brook Hotel Trust fourth quarter earnings 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 fourth quarter and full year 2024 earnings call. 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, I'd like to remind everyone that today's comments are effective only for today, February 27, 2025, and our comments may include forward-looking statements which are subject to risk and uncertainties. please refer to our SEC filings for a thorough discussion of these risk factors and visit our website for detailed reconciliations of any non-GAAP financial measures discussed during the call. We have a lot to cover this morning, so let's dive right into our financial results. We are pleased to report that our fourth quarter and year-end 2024 results significantly outperformed our outlook, driven by strong performance from our resort portfolio and continued momentum at our recently redeveloped properties. For the full year, same property total rep bar increased 2.1%, driven by gains across both urban and resort properties, along with stronger out-of-room spending. Adjusted EBITDA rose 0.8% to $359.2 million, exceeding the midpoint of our outlook by $11.2 million. Adjusted FFO per diluted share grew 5% to $1.68, surpassing our outlook midpoint by $0.09. Focusing on the fourth quarter, same property total REMPAR increased 1.8%, propelled by 4% growth at our resorts and 0.7% increases at our urban hotels. These results include a 190 basis point negative impact from two named storms in Florida and the brand conversion and renovation at our Hyatt Centric in Santa Monica. Excluding these disruptions, same property total REMPAR growth for the fourth quarter would have been closer to 3.7%. Adjusted EBITDA for the quarter reached $62.7 million, exceeding our expectations due to stronger hotel performance, particularly at our California resorts and our recently redeveloped properties. Results also benefited from $5.4 million in business interruption proceeds from the final insurance settlement for Hurricane Ian. These BI proceeds were not assumed in our prior outlook. Portfolio-wide increases in business group, corporate transient, and leisure demand fueled our growth in Q4. Same property resort occupancy jumped 3.7% to 65% despite storm-related impacts in Florida. Weekday occupancy surged 4.4 points, reflecting a continued rebound in business group demand, while weekend occupancy increased a healthy 2 points on improving leisure travel. Our California resorts led the way, with occupancy gaining 6.6 percentage points and rent part climbing 8.8%. We're very pleased to see that this momentum in both group demand and leisure at our resorts is carrying into 2025. A key driver of this encouraging growth was an almost 15% increase in business group demand at our resorts. While business groups often booked at lower ADR than weekend leisure travelers, their total revenue contribution, particularly in food and beverage, which grew 7% in Q4, plays a vital role in driving EBITDA growth. This growing mix of business groups drives increased profitability across our resort portfolio. At our urban properties in Q4, occupancy rose 2.9 percentage points to 68.1%, supported by solid group and transient demand growth, plus improving weekend leisure business, similar to what we saw at our resorts. For the full year, resort occupancy gained 2.9 percentage points to 69.9%, led by a 4.4 point increase at our California resorts. Our urban occupancy rose 2.6 points to 71.3%. Notably, San Diego, our second largest market by EBITDA, climbed 6.9 points, while San Francisco and Chicago each improved 2.8 points. Boston, our largest market, gained 2.4 points. Portland also began showing signs of recovery, gaining 1.6 points for the year. Notably, in the second half of the year, our two downtown Portland properties experienced an average occupancy increase of more than nine points. Same property resort revenue grew 4.3% in Q4, despite the storm-related disruptions, outpacing the 0.7% growth at our urban properties. Urban performance remained constrained by the ongoing headwinds in San Francisco, Los Angeles, and Portland, Excluding these three markets, same property urban rep are for Q4 would have risen 6.9%, and same property total revenues would have increased 5.7%. For the full year, resort total revenues rose 1.2%, while urban properties posted a 3.1% gain. However, adjusting for the challenges in San Francisco, LA, and Portland, same property urban total revenue growth would have been a robust 7.7%, underscoring the strength of our portfolio outside these lagging markets. Looking ahead to 2025, we believe the normalization of resort rates have largely run its course. After a 9.3% decline in 2023 and a 4.7% decline in 2024, resort rates remain 33% above 2019, and we don't expect any further meaningful rate declines at our resorts this year. Same property non-room revenues also remain healthy, increasing 3.4% in Q4 and 3.3% for the full year. Food and beverage revenues alone grew 4.1% in Q4 and 3.5% for the year, reflecting continued strong out-of-room spending by both business and leisure travelers, supported by increased business group demand. Our redeveloped properties completed in 2023, including Hilton Gaslamp, Margaritaville Gaslamp, Southern Most Resort, Jekyll Island Club Resort, and Viceroy Santa Monica, delivered strong results. Q4 occupancy for these properties rose 4.7 percentage points, RepR increased 3.8%, and market share expanded by 274 basis points. For the full year, these properties saw a 10.7 point occupancy gain, an 11.3% RepR surge, and EBITDA growth of over 20%, delivering an impressive 1,100 basis point market share gain. Turning to market segmentation, Q4 group reunites rose 2.8%, while transient room nights grew 5.6%, with group representing about 26% of total room revenue. Group mix rose 60 basis points year-over-year for the full year to 25.6%, primarily reflecting stronger business group demand trends at both our resorts and urban properties. Our intense focus on operational efficiencies and cost controls resulted in the same property hotel expense increase before fixed costs of just 3.1% in Q4. While same property occupancy increased 4.8%, this lowered our cost per occupied room by 1.7%. Same property hotel EBITDA for Q4 was $4 million below Q4 2023, reflecting several one-time costs from the new labor agreements in several urban markets, along with the impact of the Florida storms and the high eccentric brand conversion and renovation. Excluding these factors, hotel EBITDA would have increased year over year. For the full year, same property expenses before fixed costs grew by just 2.7%, and on a per occupied room basis, hotel expenses declined by 1.5%. As a result, same property hotel EBITDA exceeded 2023 by 3 million. Our relentless focus on operating efficiency was key to mitigating waste pressures and other inflationary cost pressures. Please note that in 2024, we received about $10 million in real estate tax and municipal tax credits. Additional real estate tax credits are not assumed in our 2025 outlook, creating a roughly 100 basis point headwind to our 2025 expense growth rate. While we remain optimistic about securing additional tax credits through ongoing appeals, the timing remains uncertain and unpredictable. On the capital investment front, we invested $91 million in 2024, marking the completion of our multi-year $525 million portfolio-wide redevelopment program. Early returns from these recent investments have been extremely encouraging, and John will discuss some of these during his remarks. 2025, our capital investments are projected at $65 to $75 million, reflecting our portfolio's excellent condition and reduced need for additional capital. We expect a similar capital investment level in 2026, excluding the potential Paradise Point Resort redevelopment and conversion in San Diego into a Margaritaville Resort, which remains in the review and approval process with the California Coastal Commission. At La Playa Beach Resort, we made tremendous progress in repairing and restoring the resort following Hurricanes Helene and Milton. The pool complex opened in December, and the upper floors of the 79-room beach house opened in mid-January. The remaining 20 ground floor guest rooms are expected to be substantially completed in Q2 2025, pending regulatory approvals and supply chain timelines. All repair and restoration costs are covered by insurance, net of deductibles. It's worth pointing out that we made significant improvements as part of the rebuilding of La Playa following Hurricane Ian to significantly strengthen the property against future storms. In the aftermath of Hurricanes Helene and Milton, we experienced reduced downtime, far less damage, and a much more efficient restoration process. Building on this success, we plan to make additional upgrades this year to further fortify La Playa and enhance its resilience against future storms. Looking ahead to 2025, BI proceeds from the recent hurricanes Helene and Milton will be substantially lower than those received for Hurricane Ian, creating a earnings headwind. For context, in 2024, La Playa generated $19 million in hotel EBITDA plus $23.8 million in BI proceeds, totaling $42.8 million in adjusted EBITDA. Our 2025 outlook assumes that the pie would generate 24 to 26 million in hotel EBITDA below its stabilized $35 million level, plus approximately 6 million in BI proceeds relating to Hurricane Helene and Milton for a total of 30 to 32 million. Moving to our balance sheet, we made significant strides in strengthening our balance sheet and reducing leverage in 2024. We successfully executed $1.6 billion in debt financing and extensions, pay down over $350 million in bank term loans, and extended most of the remaining term loans out to 2029. The next major maturity is our $750 million convertible note, which is not due until December of 2026. Our weighted average interest cost on our debt was 4.2% at the end of the year, one of the lowest in our industry, and reflecting our disciplined and opportunistic approach to managing our balance sheet. In addition, we ended 2024 with $217.6 million in cash, and with lower near-term capital investment needs, we expect to generate significant free cash flow this year and next. We are also pleased that the strong operating performance, combined with proceeds from the Hurricane Ian settlement and free cash flow, helped to reduce our net death EBITDA to 5.8 times, down from about 6.5 times in 2023. And with that, I'd now like to turn it over to John for a deeper look at our hotel operating results, and expectations for 2025.

Thanks, Ray, and thanks to all of you who've joined us today. I'd like to provide additional insight and perspective into last year's performance and our outlook for 2025, both for the lodging industry and for Pebble Brook. As a reminder, at the start of last year, we forecasted industry REF PAR growth at 0 to 2%. though many prognosticators were significantly more optimistic. The final result was a modest 1.8% growth with a notable 3.6% surge in Q4. So why did the industry underperform most of the higher forecasts? We believe it primarily had to do with the issue of normalization. Our 2024 forecast stems from our belief that post-pandemic demand behaviors had not yet fully normalized. We expected a prolonged adjustment period, which limited demand growth. Between April 2023 and September 2024, industry demand remained flat, which is unique in history for a period with GDP growth in the mid to upper twos. However, by Q4 2024, we observed more typical demand behavior as evidenced by a 2.2% increase in demand, more in line with GDP growth and historical norms. This trend continued in January 2025 with demand up another 1.7%, reinforcing our view that industry demand is once again more closely tracking economic growth. In 2024, business group and transient travel continued to recover and leisure demand returned to urban centers that are providing safer environments and vibrant cultural sporting and entertainment attractions. By late 2024, we saw early signs of renewed leisure travel growth industry-wide, further supporting our view that consumer travel behaviors have normalized. While some of the Q4 improvement may have been a post-election boost from reduced uncertainty surrounding the election, we believe the primary driver was the renewed link between industry demand and economic growth. For Pebble Brook in 2024, we saw continued recovery at our urban properties with demand growth coming from business group and transient, as well as leisure travelers returning to the cities. However, challenges in three key markets, San Francisco, Los Angeles, and Portland, muted our overall performance. In 2024, San Francisco suffered from a weak convention calendar. Los Angeles grappled with the lingering effects of the 2023 entertainment industry strikes, and Portland struggled with intense quality of life issues, and the slow implementation of policies to improve the city, which finally occurred later in the year, offering some optimism for 2025 and beyond. As Ray indicated, our overall performance was enhanced by excellent performance at many of our recently redeveloped and repositioned properties, where we've invested over half a billion dollars in recent years. These properties are still ramping up with significant RevPar share gains expected over the next few years, along with non-room revenue growth due to the re-merchandising and amenity additions made at these properties. As detailed in our updated investor presentation, we anticipate continued upside from these strategic investments. Let me provide a few performance examples. Embassy Suites San Diego Downtown gained over 330 basis points of REVPAR share since its last stabilized pre-development year in 2018, and all of the gains were in 2024. The Westin-San Diego gas lamp quarter has gained 1,570 basis points since its 2019 renovation, including continued improvements in 2024. Both the Embassy Suites and Westin Gaslamp are now considered stabilized following their redevelopments, and we account for them that way within the EBITDA bridge in our investor presentation. One hotel, San Francisco, transformed in mid-2022 and has gained over 4,485 basis points of REVPAR share since 2019. its last stabilized year prior to its redevelopment and brand conversion, and that includes 970 basis points in 2024. We expect further share gains this year and likely next year as well. Year over year in January, the one gained 870 basis points of REVPAR share Chaminade Resort, which we don't think is stabilized yet, though we conservatively treat it as stabilized in our EBITDA bridge, has gained 1,150 basis points of REVPAR share since 2018, including 700 basis points in 2024, as we really get going in driving significantly more group to this unique resort. Harbor Court in San Francisco has gained 900 basis points from its last stabilized year in 2019, all of which was achieved in 2024. Many of our other more recent developments and repositionings have also gained share. For example, Estancia Hotel and Spa in La Jolla is already outperforming its pre-construction 2022 levels by over 350 basis points, despite some disruption from redevelopment in 2024. We're expecting large gains in rev par share at Estancia this year, along with significant gains in non-room revenues as we added multiple outlets, event lawns, and a completely redeveloped full complex. We continue to be very excited about the major investments we've made over the last few years covering a large portion of our portfolio, and we're confident in achieving the RevPAR share gains that will drive the conservative EBITDA upside, which is detailed in our investor presentation. Now, looking ahead to 2025, we expect industry hotel demand will revert to its normal historical connection with economic growth. With GDP projected to grow two to two and a half percent, we're forecasting industry demand growth of one and three quarters to two and a quarter percent, and limited supply growth of well under one percent. That should lead to an occupancy increase of about one to one and a half percent. We expect industry rev par to grow one to three percent in 2025, with more ADR growth represented at the higher end of the range and with potential upside in the second half of the year if revenue managers gain more confidence in pricing. Our industry forecast assumes no progress in reducing the current domestic outbound to international inbound imbalance, which currently contrasts with pre-pandemic norms when international inbound was stronger than domestic outbound travel. We should note that we're increasingly cautious about the potential for a negative economic impact from the plethora of domestic policy announcements and threats from the current administration. While we were quite optimistic just a month ago, due to the overall optimism expressed by businesses and much of the public following the election, some of that enthusiasm seems to be waning. as concerns increase about extensive talk of tariffs, government firings, mass deportations, and significant reductions in federal spending, including many spending freezes already put into place. Most of these items are not business friendly. Without these very significant concerns, we would be much more positive and confident in our 2025 album. For Pebble Brook, the LA wildfires have created a tough start to 2025. Past disasters like these wildfires often bring longer-term business opportunities for the affected areas. However, they tend to primarily benefit the lower-priced hotels and submarkets. Our West Los Angeles properties, which fall into the upper upscale and luxury categories, have not yet seen increased demand. While other parts of the vast LA market have benefited from evacuees, first responders, and early cleanup efforts, our West LA submarkets, which are higher priced, have not. That said, we believe significant new demand will emerge as extensive rebuilding commences over the next few years. Additional demand drivers for LA include the NBA All-Star Game and World Cup Games in 2026, the Super Bowl in 2027, and of course, the long buildup to the 2028 Summer Olympics. The fires caused significant group and transient cancellations and led to a very substantial slowdown in bookings at our properties. While we're seeing some recent recovery in pickup, Booking volumes are not yet back to normal at our LA properties. February has been weaker than January, though March is showing improvement. Frustratingly, despite outreach from the hotel and business communities, local LA leaders, including the mayor, have not publicly encouraged business and leisure travelers to return to LA. The fires affected two major residential neighborhoods, not commercial or tourist areas, and all major attractions remain open and unaffected. All the reasons to go to LA continue to exist and are undamaged. The sun is out, the air is as clear as it normally is, and the beaches are beautiful. Of course, the silver lining here is that our comps for next year will be much easier. The negative start to 2025 for our LA properties is disappointing, given our expectations that this would be a recovery year for LA following the entertainment strikes and slow return of production last year. We're currently estimating a $9 to $12 million impact to rooms revenue, with $6.5 to $8.5 million of that occurring in the first quarter. Total revenue is projected to take a $12 to $16 million hit with $8.5 to $11 million in the first quarter. This translates to 115 basis point drag on full-year REVPAR growth and 100 basis point impact to total REVPAR. For the first quarter, we estimate a 380 basis point impact on REVPAR and 320 basis points to total REVPAR. As a result of these forecasted revenue declines, we've reduced hotel EBITDA by $9 million for the full year, with a $6.5 million impact in the first quarter. Outside of LA, our other markets are well-positioned, led by San Francisco and Washington, DC. San Francisco's convention calendar is up nearly 70% in room nights to last year, with business transient, group, and leisure travel all continuing to recover. D.C. has already benefited from the inauguration and will continue to improve from a very active congressional schedule and government transition. We expect our resorts to lead the way in our portfolio's performance in 2025, as group pace at our resorts is well ahead of 2024. For the total portfolio, Group Room Night Pace is up 3.8%, Group ADR is ahead by 1.8%, and Group Revenues are beating last year by 5.7%. Transient Pace is also ahead, up 8.3% in revenue, and Total Combined Pace is ahead a healthy 6.9% in total revenues on the books. And our overall pickup trends are providing further support for our optimism. They've improved as booking patterns and timing have finally normalized. The total for the quarter pickup in our portfolio turned positive in Q4, and excluding LA, it was again very positive in January. So if the economy remains resilient and continues on a solid growth path, We should see our nominal pace advantage grow over the course of the year instead of the opposite behavior and result last year. I also want to highlight the great success we've achieved in improving our operating efficiencies throughout our portfolio through a very intense ongoing collaboration with our operators. We continue to find new and more efficient ways to operate our properties. yet we're not sacrificing service levels. Our customer satisfaction scores and rankings increased again in 2024, and they're up significantly compared to pre-pandemic. Our success in increasing productivity and efficiencies has resulted from the full implementation of our best practices, rigorous auditing of those implementations, extensive detailed benchmarking, and better use of technology focused on eliminating waste, overstaffing, and reducing energy and utility consumption. Kind of Pebble Brook's doge, if you will. And those efforts include testing new technologies based on AI, robotics, sensors, and predictive analytics. Curator and its team have been instrumental in helping us analyze and implement these innovations and do it at favorable pricing. We've also intensified efforts to reduce costs such as workers' compensation, general liability, and property and casualty insurance. We're actively mitigating risk and reducing costs through targeted property investments and operational improvements. As a result of all these extensive efforts, total expense growth in 2025 is forecasted at 4.1% at the midpoint of our outlook. However, this figure is inflated by the absence of the $10 million of real estate and municipal tax credits received last year. Adjusted for this, total hotel expenses are forecast to grow just 3.1% at the midpoint of our outlook. This is despite inflationary pressures on wages and benefits, energy, and property and casualty insurance, as well as the increased costs typically associated with higher occupancy and expanded food and beverage operations and volumes. We're extremely proud of our team's efforts to drive efficiencies and reduce costs in 2024. With a continued relentless focus on streamlining operations, we're confident in achieving further improvements in 2025. In addition, Our disciplined approach to managing our balance sheet and maturities ensures that we remain well positioned to deliver strong returns for our shareholders while maintaining one of the lowest overall costs of total debt capital in the lodging REIT sector. As reflected in our song selection today, we have faced many challenges from Mother Earth, but we're adapting and improving and we believe we're in a good place for 2025 despite these impacts. We're looking forward to a great year this year and in the years ahead when we expect to gain the full benefit of a very favorable environment, including a growing economy, reconnected demand growth, and little to no supply growth in our markets, as well as substantial organic growth driven by the hundreds of millions of dollars we thoughtfully invested into our portfolio. Investments which are poised to generate significant further upside this year, and at least through 2027. So that concludes our remarks today, and we'd be very happy to take your questions. So Donna, you may proceed with the Q&A.