Pebblebrook Hotel

Greetings, and welcome to the Pebble Brook Hotel Trust third quarter earnings conference call. At this time, all participants are in 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, sir. You may begin.

All right. Thank you, Christine. And good morning, everyone. Welcome to our third quarter 2025 earnings call. Joining me today is John Warts, 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 are effective as of today, November 6th, 2025. Our comments may include four looking statements that are subject to various risk and uncertainties. Please refer to our SEC 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 third quarter performance was in line with our outlook. In a challenging quarter shaped by heightened geopolitical and macroeconomic uncertainty, as well as an unfavorable holiday calendar shift, we again delivered solid operating results in industry-leading cost controls. This execution sets us up well for 2026 given the robust convention and major event calendars across our markets. Same property hotel EBITDA totaled $105.4 million in line with our midpoint, while adjusted EBITDA came in at $99.2 million, exceeding our midpoint by $2.2 million. Adjusted FFO per share was $0.01, three cents above our midpoint. Together, these results reflect the resilience of our operating model, our relentless focus on driving operating efficiencies, and our disciplined cost management. On the ground, performance is led by our properties in San Francisco and Chicago, alongside strong contributions from several of our recently redeveloped resorts, including Newport Harbor Island Resort and Jekyll Island Club Resort. During the portfolio trends, same property occupancy increased nearly 190 basis points, while ADR declined 5.4%, resulting in a 3.1% decline in REVPAR and a 1.5% drop in same property total REVPAR. If you exclude Los Angeles and Washington, D.C., our two most challenged markets in the quarter, total REVPAR actually was up 0.6%. The decline in ADR was primarily driven by competitive pricing in D.C. and L.A., stemming from disruptions related to the ICE activity and the National Guard deployments. We also saw more demand coming through lower-priced booking channels, offsetting softer group attendance and government travel. Even so, occupancy increased in six of our seven urban markets and across nearly all of our resorts. San Francisco was once again the standout. RepR rose 8.3% in Q3 on a 690 basis point jump in occupancy, driving EBITDA higher by 10.9%. Growth was broad-based with increases fueled by an active convention calendar and a continued recovery in both business travel and leisure demand. Results would have been even stronger, but for the massive Dreamforce citywide convention shifting into October from September the previous year. Importantly, Positive momentum continues in San Francisco, with a very strong fourth quarter well underway. No doubt, San Francisco has gone from a laggard to a leader, led by the AI revolution, which is headquartered in the city, and by San Francisco's tremendous progress in becoming a cleaner, safer, and more vibrant city. Chicago also posted another solid quarter, with RepR increasing 2.3% on healthy leisure events, such as concerts and sports, improving weekday corporate travel, and stronger weekend leisure. These positive results were achieved despite Chicago facing an extremely difficult comp the last year when the city hosted the Democratic National Convention in August. Both San Francisco and Chicago continue to pace well through year end and into 2026, which reflects on one of the many reasons we're more constructive on next year. Our resort portfolio also remained resilient. with total rep part increasing by 0.7%, led by the exceptional growth at Newport Harbor Island Resort, where rep part jumped 29%, and total rep part surged an impressive 35.9% versus its pre-renovation performance in 2023. Jekyll Island Club Resort generated an 8% rep part increase, with total rep part growing over 11%. La Sancia La Jolla's rep part rose 5.7%, These properties illustrate the power of our redevelopment program, which is driving market share gains and growing profitability as these properties climb towards stabilization. Across our urban markets, performance was more mixed. Urban total rep part declined 2.7% as strength in San Francisco and Chicago was offset by ongoing weakness in Los Angeles and Washington, D.C., and the later year-of-year convention calendars in Boston and San Diego. Washington, D.C. was our softest market, with rev par down 16.4% due to reduced government and government-related travel demand and lower tourism activity. We expect these challenges to persist throughout much of Q4, given the federal government shutdown. However, the setup in D.C. should improve significantly in 2026, with more normalized federal travel, a favorable convention calendar, and numerous America 250 events. In Los Angeles, rep power declined 10.4%, driven entirely by rain. Greater price competition emerged from the negative impact of the devastating fires earlier in the year, and the pressures did not decline in Q3, as the ice raids and National Guard deployments created a perception of disruption and safety concerns, driving continued rate pressure. Conditions are stabilizing as the political environment cools and entertainment production gradually improves. So we expect L.A. to only be a minor headwind in the fourth quarter. Boston and San Diego experienced year-over-year declines attributed to lighter convention-wide calendars in the city, as well as softer group attendance. San Diego has also been negatively impacted all year by the significant cutback in federal government travel. That said, both markets continue to exhibit steady underlying trends in leisure and business travel. On a monthly basis, July same property total rep bar decreased 1.1%, August was essentially flat, and September fell 3.3%, with the midweek timing of the Jewish holidays being a major headwind for September, as expected. On the revenue side, same property out-of-room revenues grew 1.7%, supported by stronger event space utilization, elevated food and beverage performance, and the benefit of upgraded amenities across our redeveloped properties. Transit demand strengthened by 3.8% in Q3, as the booking window remained shorter, aided by growth in our wholesale and consortia channels. Group occupancy declined by 2%, primarily due to later than expected attendance at healthcare, education, and government-attended or related events. This trend is consistent with the national data STR has been publishing which we also highlighted last quarter. On the operating expense side, execution remained excellent. Same property hotel expenses before fixed costs rose just 0.4% year over year. And on a per occupied room basis, expenses declined about 2%. That's another quarter of exceptional operating discipline by our hotel teams and asset managers, creating efficiencies and lowering operating costs. Prior to La Playa in Naples, Florida, our weather resiliency improvements are just a week or two away from being substantially complete. We expect La Playa to generate approximately $36.6 million in adjusted EBITDA this year, including both hotel EBITDA and BI income. This compares to $42.8 million in 2024, which benefited from elevated BI collections following Hurricane Ian. On the capital side, we invested $14.2 million in the quarter, and remain on track to invest 65 to 75 million this year, reflecting a return to a normalized capital investment pace following our now-completed multi-year redevelopment program. This lower run rate supports higher discretionary free cash flow and gives us more balance sheet flexibility. We also entered into an agreement to sell one of our hotels for 72 million, with a buyer having provided a non-refundable deposit under the contract. Consistent with the person's agreement, We can't disclose a specific hotel or buyer at this time. The property has been classified as held for sale, and we expect the transaction to close in the fourth quarter, subject to customary closing conditions. That said, there's no assurance that the sale will be completed on these terms or the time. The potential disposition is not reflected in our fourth quarter or full year outlook. Shifting to our balance sheet, we remain extremely pleased with a successful $400 million offering of 1.65% convertible notes we completed in September. We used these proceeds to retire $400 million of our 1.75% convertible notes due 2026 at a 2% discount to PAR, leaving a very manageable $350 million outstanding. We also concurrently repurchased $50 million worth of common shares during the quarter at a significant discount to NAV, which is accreted to FFO and NAV per share. We entered Q3 with $232 million of cash, and we expect to generate over $100 million in free cash flow by the end of 2026. Our plan is straightforward. Use cash on hand and free cash flow to take out the remaining convertible notes maturing in December 2026. All told, it was another quarter of disciplined execution amid a choppy and uncertain demand backdrop. And with that, I'll hand it over to John to provide more details on the third quarter our outlook for Q4, and a look ahead to 2026.

Don. Thanks, Ray. When we look at the industry's performance, the third quarter looked a lot like the second, only a bit softer. Demand was slightly down year over year, and that caused renewed pricing competition, which led to a lack of ADR growth. Group demand was most pressured. It was lower in all three months due to reduced government travel weaker international participation at conventions and conferences, and some increasing attrition. Transient demand, including leisure, held up better. It remained positive versus last year. That mix favored weekends over weekdays for the broader industry and for Pebble Brook. 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 much more weakness as cost-conscious consumers pull back on their discretionary spending. In Q3, we faced the same fundamental challenges as the industry, but the localized disruptions in LA and Washington, DC drove our third quarter performance below the industry average. To put that disruptive impact into perspective, LA and DC represented roughly $7 million of the $7.9 million year-over-year decline in same-property hotel EBITDA. Throughout our portfolio, we continue to see a recovery in business transient travel. Like the industry, group room nights and group revenues were slightly negative in the quarter versus last year while business and leisure transient demand continued to improve. Due to the resiliency of leisure demand, weekend occupancies were up all across our portfolio, urban and resort, demonstrating the continued appeal of our high-quality properties, especially for leisure and social group customers. Weekday occupancy also grew due to the continuing recovery in business transient travel And our teams focus on replacing group and government shortfalls and rebuilding overall occupancies through discounted wholesale and consortia channels. I'd also like to briefly highlight the performance at our redeveloped properties because it's a key part of our improved performance in 25 and it should provide a similar boost in 2026. We praised the terrific performance of Newport Harbor Island Resort last quarter, and it deserves that praise again this quarter. In Q3, Newport led the way in our portfolio, delivering $11.8 million of EBITDA in its most important seasonal quarter, up $2.9 million year over year on a 21.6% total revenue increase and strong flow through. That's exactly the ramp we expected from the comprehensive $50 million transformation completed last spring. That's a higher quality overall resort experience with more compelling venues delivering increased event capacity and a richer food and beverage mix, all together driving higher ADRs and higher out-of-room guest spend. For the full year, We now expect Newport to generate almost $17 million of EBITDA ahead of the $13.6 million at acquisition and much higher than our forecast just 90 days ago. We're very excited about Newport's future. Hats off to the resort's operating team. And 2025 is just our first full year of post-redevelopment operations. So we believe the resort is well-positioned to generate even stronger performance over the next few years as it continues its ramp and it benefits from increased exposure to group and leisure demand. And Newport is just one example of the benefits of our strategic redevelopment program. Our comprehensively upgraded and transformed hotels and resorts across our portfolio are gaining share and growing cash flow with more runway ahead. This includes, among others, Estancia La Jolla, Chaminade Resort and Spa in Santa Cruz, Hotel Zena and Viceroy in D.C., One Hotel San Francisco, Hilton Gaslamp, Margaritaville Gaslamp, Lobert's Del Mar, and Jekyll Island Club Resort. These properties are demonstrating the benefits of the transformative nature of our redevelopment program through sustained market share gains, higher out of room spend, and higher profitability. Operationally, our teams again did the hard things well in the quarter. They found efficiencies and controlled costs. Same property total expenses were limited to just 0.7% growth. On a per occupied room basis, cost declined. That's a direct result of our team's relentless focus on improving every aspect of our operating cost structure through our strategic productivity and efficiency program. On the technology front, we continue to pilot AI-enabled tools aimed at improving hiring, retention, service delivery, cleanliness, and overall productivity across our 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 expect the hotel operating model to look quite different in a few years from now, and we intend to stay ahead of that curve. We've also begun implementing some of the new technologies aimed at reducing energy and water usage, and we're investing in new systems, including solar and HVAC upgrades, where the ROI is compelling. Now shifting to the fourth quarter, we remain cautious on Q4 given the macroeconomic outlook and the ongoing uncertainty related to the government shutdown, tariff policy, governmental efforts to reduce government spending, and the ultimate impact of these policies on the economy. While it's becoming increasingly clear where the level of most tariffs are likely to settle, Particularly with the most recent events in Asia, we believe both businesses and consumers remain more cautious until there's more clarity on the details of these agreements and until the shutdown ends. Economists agree as they continue to forecast slower growth in the near term. Specifically, the government shutdown, now in its sixth week, is clearly hurting travel. Government travel and travel to visit with the government is down all over the country, and it's obviously much more pronounced in Washington, D.C. Many business and leisure travelers are becoming more hesitant about air travel while the shutdown persists. Unfortunately, we've seen a notable increase in government and government-related cancellations everywhere, and we've experienced slower pickup in many markets around the country, especially in D.C. and to a lesser extent in San Diego. This negative impact is now showing up in the STR numbers for the industry. Rev part growth, which was primed for a very positive October, is now trending closer to slightly negative for the month. Our preliminary October results were more favorable. Total rev part increased approximately 4%. This illustrates the benefits of our high-quality properties and the added and enhanced venues, event spaces, and amenities throughout our portfolio. Our concern, of course, for the rest of the quarter is that air travel is likely to be impacted at increasing levels as the shutdown lengthens, and then the recovery may be more gradual once the shutdown ends. DOT's announcement last night of a 10% reduction of flights beginning Friday won't help demand unless it leads to a quicker resolution of the shutdown. As a result, it's difficult to forecast the rest of Q4, but our current outlook assumes the shutdown will end soon. As of October 1st, our revenue pace for Q4 was ahead of last year by 2.1%, or $2.6 million. This represents an improvement from 90 days ago. With the government shutdown lasting the entire month of October and already a week in November, the positive pace for Q4 has likely been negatively impacted, but we don't yet have data on that and we won't for a few more days. Our Q4 outlook assumes same property rev par will range between minus 1.25% to up 2%, with total rev par between a negative 1.25% and a positive 2.7%. On the cost side, due to the benefits of our strategic efficiency and productivity efforts, we expect total hotel expenses to grow just 0.8% at the midpoint. That means expenses per occupied room should decline again in Q4. As we look ahead to 2026, we remain cautiously optimistic due to our belief that fundamentals provide a favorable setup for next year. We believe macro and economic uncertainty will fade, hotel demand is likely to normalize with GDP growth, and we know new supply will remain at historically low levels. I know there are many professional prognosticators who are currently forecasting limited REF PAR growth for 2026, but there are several significant pluses for next year, both for the industry and specifically for our portfolio. Let's start with prospects for favorable demand growth in 2026 and a return to the positive correlation between GDP growth and hotel industry demand growth. I know some skeptics out there believe there's no longer a correlation, but we don't fall into that camp. As the monkey sang, I'm a believer, we strongly believe that our industry has experienced a unique set of factors that have temporarily disrupted the correlation. And as these factors fade or disappear, demand growth should resume its positive historical connection to GDP growth. Listen to these numbers. for annual hotel room night demand growth beginning back in 2010. 2010, 7.2% coming out of the Great Financial Recession. 2011, 4.6%, still recovering from the GFC. 2012, 2.8%. 2013, 1.5%. 2014, 3.9%, 2015, 2.4%, 16, 1.6%, 17, 2.2%, 18, 2.2%, and 2019, 1.5%. Pretty consistent and healthy demand growth for every year in the economic cycle. I'm going to skip 20 to 22 which were pandemic impacted with huge negative and then positive volatility. So for 23, demand growth was 1% with continuing normalization from the pandemic growth blip in 22. 2024, 0.6% with the first three quarters of normalization. And for 2025 year to date through September, it was negative 0.2% with massive disruptions from government cutbacks, material declines in international inbound travel due to nationalistic rhetoric, and significant economic uncertainty due to arguably the most significant policy uncertainty in the past 50 years. Could there be more material disruptions in the future? Of course there could be. However, we believe it's more likely that much of this uncertainty dissipates and the business and investment-friendly legislation passed a few months ago, combined with the benefits of significant deregulation, will finally begin to kick in in a very favorable way and provide a nice tailwind for the macroeconomic environment in 2026. And the supply picture continues to provide a fundamental tailwind for the industry and for us in our markets. There is very little supply being added in the industry. and new construction starts continue to run lower than deliveries. Given that it takes three to four years to deliver new high-rise urban or resort properties from the first shovel in the ground, the runway for recovery and improvement is long whenever we get to the runway, which we hope is next year. The other significant tailwind for 2026 is that the holiday calendar next year is meaningfully more favorable than 2025. For example, for all you sweethearts out there, take note, Valentine's Day falls on a Saturday next year versus a Friday this year. Sorry. The gang here is cracking me up. And it also falls over the President's Day weekend, creating the potential for a much stronger leisure weekend with less midweek disruption. Juneteenth shifts to a Friday from a Thursday, reducing the negative impact on weekday business travel from the holiday. July 4th moves to a Saturday from a Friday, creating the perfect weekend for all the America 250 celebrations. The Jewish holidays in the fall occur either over a weekend or a Monday, thank God, causing less of a negative impact on business travel for those two weeks. Halloween falls on a Saturday next year versus a Friday this year. That's a definite treat for less midweek disruption. Christmas provides a nice gift by moving closer to the weekend, creating a more favorable long weekend for holiday leisure travel. And New Year's Eve also moves closer to a weekend creating a better pattern for leisure travel to celebrate the year end. The hotel industry will also benefit from a uniquely active major events calendar next year. Numerous cities will be boosted from the World Cup being hosted in the U.S. and from many activities surrounding America's 250th anniversary celebration. For Pebble Brook, we expect to benefit from all these tailwinds as well as a few of our own, Based on what we know today, we believe we'll outperform the industry next year. Our redeveloped properties, which are still ramping up, will contribute to this outperformance. Several of our urban markets, including San Francisco, Portland, and Chicago, are primed to continue their recoveries. LA comps will be much easier due to the negative impact from the fires and other safety-related disruptions. DC, too, has easy comps for next year, along with a stronger convention calendar. On top of that, we expect to see significant incremental demand from a multitude of major events across our portfolio, 28 World Cup matches across our markets, featuring eight matches in LA, seven matches each in Boston and Miami, and six in San Francisco. NCAA men's basketball tournament rounds in four of our markets, the 250th US anniversary celebrations in DC, Boston, and likely other cities, the Super Bowl in San Francisco, the NBA All-Star Game in Los Angeles, and the College Football National Championship Game in Miami. While most of these major events have yet to put many rooms on the books for next year, except for the Super Bowl in San Francisco, our group and total revenue pace for next year are currently favorable. As of October 1st, 2026 group room nights were up 4.1%, ADR is ahead by almost 3%, and group revenues are up over 7%, or $7.6 million over 2025. Total revenue pace, including both group and transient, is up by 6.1%, or $9 million ahead of the same time last year. So while none of this guarantees a great year, the setup for 2026 is very positive. We've got a favorable pace. We have easy comps in LA. DC should settle down. San Francisco is recovering very strongly. We've got significant upside from our numerous redevelopments. The holiday calendar is meaningfully more favorable next year. The uniquely strong calendar of events will materially benefit our markets. And business uncertainty is likely to significantly dissipate as tariff policy is resolved and as business investment ramps substantially through AI and reshoring. As a result, we're optimistic about a positive trajectory for next year. By executing on our strategic plan, driving revenue, maximizing efficiencies, and growing free cash flow, we're creating the foundation for strong, durable, long-term value creation. We have a solid balance sheet, a redeveloped portfolio, and a very favorable multi-year supply setup, which positions us well to take advantage of a growing economy. We just need the macro to finally fall into place without major disruptions. That wraps up our prepared remarks. Christine, we're ready to open it up for Q&A.