Pebblebrook Hotel

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Raymond Mars, Co-President and Chief Financial Officer. Thank you. You may begin.

Thank you, Donna. And good morning, everyone. Welcome to our second quarter 2025 earnings call. 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, I'd like to remind everyone that our remarks today are effective only as of today, July 30th, 2025. Our comments may include forward-looking statements that are subject to various risks and uncertainties. Please refer to our STC filings for a detailed discussion of these risk factors and visit our website for reconciliations of any non-GAAP financial measures mentioned today. Now, let's jump into the quarter. We're pleased to report that our second quarter performance exceeded our outlook. Our results are driven by healthy occupancy gains, continued resilient -of-room revenue growth, and another strong quarter of cost discipline and efficiency improvements. As a result, we exceeded the midpoint of our same property, Hotel Ibiza Outlook, and came in above the high end of our ranges for both Adjusted Ibiza and Adjusted FFO. Same property, Hotel Ibiza, totaled $115.8 million for the quarter, $1.8 million ahead of our midpoint. As anticipated, Los Angeles remained a modest drag on performance with a $2.2 million Ibiza headwind, which was about $700,000 more than we anticipated. Occurringly, the rest of the portfolio more than offset the softness, reinforcing the strength and diversification of our portfolio. To better understand the underlying performance of the portfolio, if we adjust for the one-time real estate tax credits in last year's results and exclude Los Angeles, same property, Hotel Ibiza increased by $2.5 million over the prior year quarter. And on a -to-date basis, same property, Hotel Ibiza, is up $2.3 million. These adjusted figures more clearly reflect the continued recovery in our other markets and a meaningful ramp-up across our recently redeveloped hotels and resorts. One key trend that we're watching closely is the continued shortening of the booking window, especially for leisure travel. It's putting near-term pressure on leisure rates and reducing forward visibility in today's uncertain macroeconomic environment. That said, our teams have adapted quickly, capturing demand within shorter lead times. Despite these headwinds, our teams executed exceptionally well. Hotel level results were strong across most markets, more than offsetting the softness in LA and Washington, DC. Adjusted Ibiza was $117 million, $6.5 million above our midpoint. Adjusted FFO came in $0.65 per share, $0.06 ahead of our midpoint. This outperformance reflects a combination of solid hotel Ibiza results, a strong $1.8 million beat from Newport Harbor Island Resort, and $1.5 million more than expected in business interruption proceeds when we apply as insurance claims. Newport, which is excluded from our same property results due to its closure for part of Q2 last year, outperformed expectations, fueled by strong business groups and leisure demand, and excellent flow through across rooms and non-rooms revenues. We also received $3.2 million of BI income related to La Playa, $1.5 million above our outlook. Turning to hotel level performance, total property, same property rep bar grew by .3% year over year, led by a .7% increase in our urban portfolio and a .6% gain at our resorts. However, the strength of the broader portfolio is more apparent when we exclude Los Angeles, which continues to face a unique set of market-specific edu-winds. Excluding LA, same property total rep bar rose 2.7%, with our urban portfolio increasing a healthy 4.1%. These are encouraging results, particularly in light of reduced government travel, weaker international inbound demand, and macroeconomic surges stemming from ongoing policy and geopolitical disruptions. San Francisco leather portfolio once again this quarter, with rep bar climbing a robust 15.2%, fueled by an impressive 9-point increase in occupancy. The city's performance was supported by a stronger convention calendar, robust growth in business group and transient demand, particularly from the expanding tech and AI sectors, and a continued push for a return to office among the city's major employers. Momentum continues to build in San Francisco, and John will share more color in that shortly. Portland continued to recover, with rep bar climbing .4% as the market continues to rebound from its more prolonged COVID-related challenges. Gains were driven by increased business travel and a steady rise in demand from regional leisure travelers, again, evidenced by healthy gains in weekend occupancies. In San Diego, our urban hotels posted a rep bar growth of 8.6%, fueled by a healthy convention calendar and strong weekday demand. Our recently redeveloped downtown properties continue to outperform, gain market share, and deliver meaningful growth in both rate and occupancy. At our resorts, demand remained resilient. Total rep bar increased .6% year over year. As a one-point occupancy gain, a continued strength in -of-room spending offset a nearly 3% decline in ADR. This gain underscores the resilience of leisure demand. -of-room revenues at our resorts rose 3.3%, led by a .5% growth in food and beverage revenues as gifts continued to spread across our resort dining outlets, bars, and event offerings. Same property total revenues grew 1.3%, driven by a .7% increase at our urban properties. Excluding the LA, revenue growth rose 2.7%, supported by stronger event space utilization, elevated food and beverage performance, and the benefit of upgraded amenities across our redeveloped properties. Total -of-room revenues increased .6% overall, and climbed .5% excluding LA, with food and beverage revenue up .3% year over year. Looking at our monthly trends, April was our strongest month, with rep bar increasing by 3.6%, benefiting from a favorable Easter shift, an extended spring bake season, and a major San Francisco convention that moved into April this year from May last year. That timing benefit created a tougher comp for May, which was down 0.8%, and June declined 0.6%. Excluding the LA, rep bar was positive in all three months, up .5% in April, .7% in May, and .6% in June. Group demand also remained strong, with group roommates rising .9% and accounting for 27% of room revenue up 100 basis points from last year. This reflects the continued resilience of the group segment and their early success of our multi-year strategic reinvestment program, particularly at our resort properties, where we've been focused on growing group-related business. On the expense side, our teams remain laser-focused and delivered another strong quarter of disciplined cost control, along with further productivity and efficiency improvements. Same property hotel expenses, excluding fixed costs, rose just .7% year over year, and on a per-occupied room basis, expenses declined by 0.8%, a very favorable result. Energy was to stand out this quarter, but cost down 2.1%. This was driven by reductions in energy and water usage, following some focused efforts to optimize the efficiency of some of our hotel systems and equipment. These results reflect the relentless focus and innovative efforts of our hotel teams and asset managers. Our strategic productivity and efficiency program is driving meaningful operating improvements, enhancing yet satisfaction, profitability, and long-term value. We're incredibly proud of the execution across the portfolio. Looking ahead, we're also embracing new technology as a lever for future efficiency gains. We've begun piloting a number of AI-enabled operating tools in collaboration with our hotel partners, which we believe will lead to increased productivity, reduced hotel operating expenses, improved hiring and retention, and enhanced real-time decision-making. We believe these tools will have the potential to significantly reshape our operating model over time. Shifting now to LaPy in Naples, Florida, we're pleased to report that the resort is fully restored and operational following last year's hurricanes. We've increased our full-year BI income forecast to $11.5 million, up from $8.5 million previously. We now expect LaPy to generate approximately $35.5 million in adjusted EBITDA this year, including both hotel EBITDA and BI income. This compares to $42.8 million in 2024, which included elevated BI collections following Hurricane Ian. As a reminder, BI income is excluded from our same property hotel EBITDA, but is included in adjusted EBITDA and FFO. Turning to insurance, we completed our property insurance renewal on June 1, which significantly bettered the results than expected. We reduced our overall premium by roughly 10% thanks to a 13% rate drop, while increasing insurable values by 4% to reflect higher replacement costs, all without material changes to coverage or business terms. This favorable outcome lowers our near-term expense run rate and demonstrates the success of our proactive risk management strategies. On the capital front, we invested $21 million into the portfolio during the quarter, neither the key money received from Hyatt related to the Delfino-San Monica rebranding and renovation. We remain on track to invest $65 to $75 million this year, primarily focused on capital maintenance and targeted ROI projects. And finally, our balance sheet remains in great shape. We ended the second quarter with $267 million of cash on hand, an increase of $49 million from last quarter, and we have more than $649 million of availability on our unsecured revolver. Nearly all of our debt is unsecured, and we have no significant maturities until December 2026. Our weighted average interest cost is a very attractive .2% among the lowest in the sector, with 96% of our debt now fixed. We continue to generate strong free cash flow in addition to our existing cash, and we intend to deploy the vast majority of it towards future debt paydowns, including the convertible notes. And with that, I'd like to turn the call over to John for a deeper dive into hotel operations, industry trends, and expectations for the rest of the year. John?

Thanks, Ray. When we look at industry performance in the second quarter, we note that demand softened slightly from Q1. Both demand and rev-par for the industry were negative in Q2 on a -over-year basis. The decline was led by group, which was down in all three months versus last year, largely due to reduced government travel, weaker international participation in conventions and conferences, and some increasing attrition. Transient demand held up better, and while it was weaker for the same reasons, it remained positive versus 2024. I recognize that the group softness may surprise some of you, but the STR data clearly shows this trend over the last three months, and it has unfortunately continued into July. In terms of industry performance by price point or scale, there remains a sharp divide between the upper and lower ends of the market. Premium hotels and resorts continue to perform better, while the bottom half is seeing more weakness as lower-income consumers shift some of their spending toward necessities. In contrast, Pebblebrook outperformed the industry during the quarter. We successfully grew occupancy, including from group, and delivered modest rev-par growth, even with the specific market challenges in Los Angeles. We attribute our outperformance to the strong recovery in several previously lagging markets, like San Francisco, Portland, and Chicago, and the continued share gains at our redeveloped properties. While our San Francisco hotels led the way in our portfolio, our redeveloped hotels and resorts once again were leaders, including Newport Harbor Island Resort, Estancia, and Southernmost Resort in Key West, and several urban standouts like the One Hotel San Francisco, Hilton Gaslamp Quarter, and Margaritaville San Diego Gaslamp Quarter. For our portfolio, we continued to see a recovery in business travel in both transient and group. Group room nights, group ADR, and business transient rates all improved. Leisure demand also grew, though we saw increasing price competition due to much shorter booking windows. Still, weekend occupancies were up all across our portfolio, demonstrating the continued appeal of our high-quality properties, especially for leisure and social group customers. As mentioned, our results were even stronger, excluding Los Angeles, which faced another difficult quarter. The combination of a post-fire slowdown in business and transient demand, and the often exaggerated media coverage around the ICE raids, which created the impression that the protests and damage were all over the city when in fact they were isolated to a few blocks in downtown LA, caused cancellations and a slowdown in bookings. The administration's military response only amplified the negative media coverage, creating an even broader misperception about safety in the market. Despite these short-term challenges, we remain confident in LA's long-term outlook. It's a global gateway destination. It's the entertainment capital of the world. And it has big, beautiful beaches and great weather among many unique amenities. We don't expect to see any meaningful new hotel supply for the next five to ten years. We're encouraged by the new state legislation doubling film and television tax credits to $200 to $750 million, which will help spur production activity, much of which should directly benefit Los Angeles. The city also passed legislation that makes it easier and cheaper to film in Los Angeles, and the president has talked about making Hollywood great again by bringing production back to the U.S., especially to LA. Additional demand for LA will come from a loaded future calendar of events, starting with the NBA All-Star Game in February and eight World Cup matches next summer, then the Super Bowl in 2027, and finally the Summer Olympics in 2028, including all the preparation generating demand in 2026 and 2027. Plus, the rebuilding of thousands of homes in the two neighborhoods destroyed by the January fires should also generate incremental demand for the market well before the games begin. San Francisco, one of our previously slower to recover cities, demonstrated very strong performance in Q2 for the second quarter in a row and led all of our markets. RevPAR for our seven hotels there rose a robust .2% with occupancy gains in the market from all segments. Business travel rose significantly from a better convention calendar and increases in transient and in-house group. Leisure demand also grew as leisure travelers returned to the city. SF Travel is doing a great job bringing more concerts, sporting events, and future conventions to the city, which is drawing increased business and leisure travel. We're also extremely encouraged by the new city leadership, who are focused on improving safety, cleanliness, and quality of life issues. San Francisco looks and feels great. It's rapidly getting busier and very positive momentum is clearly building each day. San Francisco has definitely turned and we're very excited. Portland and Chicago also made progress. Both cities are benefiting from cleaner, safer downtowns and are hosting more concerts and sporting events in their many venues, helping to successfully attract leisure back to the cities. Turning to performance at our redeveloped properties, Newport Harbor Island Resort led the way as the resort continued its strong ramp following the $50 million transformation completed last spring. The resort generated $5.1 million of EBITDA in Q2, which was $1.8 million above forecast. Revenues rose over 60% from Q2 last year and out of room revenues jumped 70%, making up 50% of the resort's revenue mix. This revenue shift demonstrates the benefits of the significant improvements and additions we made to the restaurants and bars, as well as the dramatic enhancements we made to the number and quality of indoor and outdoor event venues. We now expect Newport to generate over $15 million of EBITDA in 2025, well ahead of the $15.6 million at acquisition in mid-2022, which was a peak year for most resorts. We're very excited about Newport's future. In 2025, it's just our first full year of post-redevelopment operations. We believe the resort is positioned to generate even stronger performance over the next few years as it continues its ramp and benefits from increased group and leisure demand. And Newport is just one example. Across the board, our redeveloped hotels and resorts are gaining share and growing cash flow, with most still having multiple years left until they stabilize. This includes Estancia, Chaminade, southernmost, One Hotel San Francisco, Hilton Gaslamp, Margaritaville Gaslamp, and Jekyll Island Club, among others. There's more upside to come. Now shifting to operations. As Ray noted, we held same property total expenses to just .7% growth after adjusting for last year's tax credits. Per occupied room, expenses declined. That's a direct result of our team's relentless focus on improving every aspect of our cost structure and the benefits of our strategic productivity and efficiency program. We're working collaboratively with our operators to attack every expense category with targeted productivity and efficiency initiatives. This includes smarter labor scheduling through new technology and training, tighter procurement, appealing our tax assessments with almost 100 tax appeals underway, and operational upgrades to reduce accidents and claims. We're also investing in physical improvements to mitigate weather-related damage, particularly at properties like La Playa. On the technology front, we're piloting AI and automation tools aimed at improving hiring, retention, service delivery, and overall productivity across the portfolio. The pace of AI and robotics innovation is accelerating rapidly, and we're working closely with curator to identify and implement the most impactful solutions. We believe the operating model for hotels will look quite different in a few years, and we intend to be ahead of that curve. We're still in the early innings of new technology that reduces energy and water usage. We're applying the findings from our engineering audits and rolling out new systems, including solar and HVA upgrades, where the ROI justifies the investment. On top of that, we're actively pressing the major brands to pass through savings through their economies of scale and from the rollout of their own AI tools and centralized services. We believe these will evolve meaningfully over the next few years, ultimately resulting in additional cost reductions for owners. We're also clustering more operating teams where it makes sense to reduce costs and improve our property leadership teams. We're leaving no stone unturned. We're in the early stages of what we see as a transformational shift in hotel operations, and we intend to lead that evolution. Our teams deserve tremendous credit. Their creativity, discipline, and relentless execution are driving positive results and positioning us for even greater success going forward. Now, let's shift to the third quarter and the macro outlook. We remain cautious about the macroeconomic outlook, given the continuing uncertainty related to tariff policy and governmental efforts to reduce government spending and the ultimate impact of those policies on the economy in the next few quarters. While it's becoming increasingly clear where most tariffs are likely to settle, we believe both businesses and consumers remain hesitant until there's more clarity. Economists continue to forecast slower growth in the back half of this year. As a result, we expect a demand growth outlook to remain muted in the second half of this year, with Q3 likely the weakest quarter due to its heavier leisure mix. Leisure demand is expected to remain relatively price sensitive. For July, RevHor is trending down 2 to 3 percent for our portfolio, though we expect higher occupancy year over year. That increase is being offset by modest ADR declines. In addition to the continuing overall weakness in Los Angeles from the multitude of negative events in the market, we're facing some less favorable citywide comps in Q3 in markets like Chicago, which hosted the DNC last year, Boston, and San Diego to a lesser extent. Our total revenue pace for Q3 is down 3 percent, with group pace down 4 percent, mostly on group room nights. In addition, group attrition has recently ticked up modestly. On the brighter side, Q4 group pace is currently flat, and we're no longer seeing the same group hesitancy to sign contracts that we experienced last quarter. And importantly, we've not yet seen any increase in group cancellations. This gives us greater confidence that Q3 will likely mark the low point in performance for the year. As a result, our Q3 outlook assumes same property RevPAR will decline 1 to 4 percent, with total RevPAR down 0.5 percent to 3.2 percent. On the cost side, due to the benefits of our strategic efficiency and productivity program, we expect total hotel expenses to crow just 0.2 percent, which means expenses per occupied room should decline again. As for the year, the midpoint of our guidance still reflects our most likely outcome. While there's still macro uncertainty, the good news is we see no systemic issues at this time. Employment and corporate profits remain solid. If policy uncertainty improves, that alone could give the economy a boost, which should benefit the hotel industry. We're increasingly optimistic about 2026. If economic uncertainty fades, hotel demand should normalize with GDP growth. Supply is extremely restricted, and our industry fundamentals are set up for a very good year. For Pebblebrook, we're in a very good place, and we expect to outperform the industry. Our redeveloped properties will contribute to this outperformance. Several of our urban markets, including San Francisco, Portland, and Chicago, are expected to continue their recoveries. LA comps, of course, will be much easier. On top of that, we'll see incremental demand from a multitude of major events across our portfolio. Seven World Cup matches each in Boston and Miami. NCAA men's basketball tournament rounds in five of our markets. The 250th US anniversary celebrations in DC and Boston. The Super Bowl in San Francisco. And the NBA All-Star game and World Cup matches in Los Angeles. While most of these events have yet to put many rooms on the books for next year, except the Super Bowl in San Francisco, our group and total pace for next year are currently very favorable. For 2026, group room nights are up nearly 9%. ADR is ahead by almost 4%. And group revenues are up by 13.1%. Over $10 million ahead of 2025. Total revenue pace, including both group and transient, is up by a strong 19%. Over $17 million ahead at the same time last year. So while none of this guarantees a great year, the setup for 2026 is very strong. We're confident in our trajectory by executing on our strategic plan, driving revenue, maximizing productivity, and growing free cash flow. We're creating the foundation for durable long-term value creation. With a solid balance sheet, proven execution, and a redeveloped portfolio, we're positioned not just to navigate uncertainty, but to capitalize on it. We just need the macro to fall into place. To wrap up, we believe our relentless focus on generating operating efficiencies, our disciplined and nimble revenue strategies, our team's deep experience navigating cycles, and the transformational investments we've made across the portfolio all position us to outperform and deliver meaningful long-term returns. So that completes today's remarks. Donna, we'd now be happy to proceed with the Q&A.