Pebblebrook Hotel

Greetings and welcome to the Pebble Brook Hotel Trust second 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. You may begin.

Thank you, Christine, and good morning, everyone. Welcome to our second quarter 2026 earnings call. Joining me today is Jon Bortz, our chairman and chief executive officer, and Tom Fisher, our co-president and chief investment officer. But before we begin, I'd like to remind everyone that our comments today are as of July 30th, 2026. Today's comments may include forward-looking statements that are subject to various risks and uncertainties. Please refer to our SEC filings for a detailed discussion of these risk factors and visit our website for reconciliations of non-GAAP financial measures mentioned today. Now, let's head into the second quarter results. We delivered another excellent quarter, exceeding the high end of our outlook across every key earnings metric for the second consecutive quarter. Same property hotel EBITDA increased 7.1% to $123.3 million, $6.6 million above the high end of our outlook Adjusted EBITDA was $116.2 million, $6.2 million above the high end. And adjusted FFO per diluted share was $0.68, $0.06 above the high end. The story of the quarter was straightforward. Our resorts and San Francisco led the portfolio. Stronger pricing drove total revenue growth. Our teams expanded margins and disciplined capital allocation activities amplified our per share growth. Let me take each in turn. At the portfolio level, same property occupancy increased approximately 130 basis points to 79.4%, ADR grew 4.7%, REF PAR increased 6.5%, and total REF PAR climbed 4.7%. Nearly three-quarters of our REF PAR growth came from rate, a meaningful shift from recent quarters when occupancy gains did most of the work. As occupancy rebuilds, greater compression is giving our teams more pricing confidence which is supporting higher room rates. We also see less price sensitivity among upper end consumers, benefiting our premium resorts in higher end urban properties. Let's start with the leaders. Our resorts with a principal growth engine in Q2. Resort rep are increased 12% and total rep are climbed 10.9%, supported by continued robust out of room spending. The strong revenue growth drove hotel EBITDA for our resorts up 18.5%, with 216 basis points of EBITDA margin expansion. Apply led the way, with occupancy climbing more than 11 points, rep part increasing 33.9%, and EBITDA rising 28.8%, as its post-hurricane construction ramp-up continued. Curious Point in San Diego was close behind, growing rep part 22%, and EBITDA up by more than 40%. Resorts generated roughly $16.5 million of the portfolio's $18.3 million revenue increase and their $8.9 million even again more than offset the declines in urban markets held back by weaker convention calendars. More important than the headline growth was the broad nature of the improvement. At our resorts, group room nights increased 18% and group revenue grew nearly 19% led by association and corporate group demand. Transient ADR rose more than 12%, producing nearly 10% transient revenue growth on slightly fewer room nights. That powerful combination, rising group volume, and stronger transient pricing, demonstrates the return on the capital we've invested in guest rooms, meeting spaces, outdoor venues, restaurants, and bars. Newport is a good example. Repart grew 20.3% on a 13.5% ADR increase with total rep part growth of 18.6%, translating into EBITDA growth of almost 26%. Estancia, another recent major development, generated rep part growth of 22.8%, total rep part growth of 19.6%, and EBITDA growth of 54.7%. Both of these resorts continue to gain share following their redevelopment and luxury repositioning. San Francisco was once again our top urban market. High comes to increase nearly 500 basis points, and the ADR rose almost 9%, driving Repar 16% higher, and Hotel even got 24.6% higher, roughly 250 basis points of margin expansion, all without the RSA citywide, which shifted to March this year. The snowflake and data break citywide in June more than made up for the difference, and business transit and leisure demand were very strong beyond the city-wise. Year-to-date, EBITDA at our seven San Francisco hotels is up by more than $13 million, or 110% versus last year, making significant progress against the $18 million recovery opportunity detailed in our updated investor presentation. Los Angeles is following a similar path, but with less intensity. Repar up 8.6%, hotel EBITDA up almost 14%, and year-to-date EBITDA higher by approximately 6 million or 73%. Capturing the larger 22 million upside opportunity for our entire LA portfolio as outlined in our investor presentation will require continued market recovery and property level execution but the momentum is building and the 2027 Super Bowl and the 2028 Olympics will provide a big push. Our weaker urban markets included downtown San Diego were RepR declined 9.1% against a difficult citywide comparison. And Washington, D.C. were RepR declined 9.9% amid weak government-related travel demand and significant property-level leadership transitions, which are now largely complete. Overall, urban RepR increased 4.1%, but urban total RepR increased only 0.8%, and urban hotel EBITDA declined 1%. The strong performance in San Francisco and Los Angeles was offset by weaker convention calendars and bankrupted catering revenue in San Diego and Boston, along with continued government-related weakness in Washington, D.C. The result was a shift from group to transient demand, which is worth a closer look. Portfolio-wide, the quarter was transient-led. Transient revenue was up nearly 10% on a 7% increase in ADR, concentrated in higher-rate channels. Group revenue declined approximately 2%, while corporate group revenue was essentially flat. Importantly, the group softness reflected the convention rotation, not corporate demand pullback. That mix also helps explain the gap between the portfolio's 6.5% REFAR growth and 4.7% total REFAR growth. Out-of-room revenues grew 1.7%. Urban, banquet, and catering revenue declined approximately 20%. concentrated primarily where the citywide calendars were weakest and where World Cup matches scared off groups. By contrast, resort food and beverage revenue grew nearly 11%, with banquet and catering revenue increasing more than 16% on resort occupancy growth of 310 basis points. Where group and transit customers showed up, they kept spending and spending a lot. Looking at how the quarter developed, April started well, with Repar rising 6%. May was the softest month, as we flagged last quarter, up roughly 2% on later convention calendars. June then accelerated sharply, with Repar up nearly 12%, driven by an ADR increase of 14%. I can see it actually dipped slightly, so June was entirely a pricing story. World Cup increased Repar modestly in June and in the quarter, but reduced non-root revenues. Jon will discuss the overall World Cup impact in more detail in his comments. So that's the revenue story. The earnings story is how effectively our teams turned that revenue into profits, and they did another great job. They converted 4.8% total revenue growth into 7.1% same-property hotel EBITDA growth, with same-property total expenses increasing just 3.8%, and margins expanding 67 basis points to 30.6%. The discipline shows up across the P&L. Rooms expense grew at less than half the pace of rooms revenue, increasing only 3.1%, even as occupancy climbed 130 basis points and room revenue grew 6.6%. Energy expenses were also well contained, up 2.7% for the quarter and flat year-to-date, reflecting the benefit of our energy reduction and sustainability initiatives. On a per occupied room basis, total expenses increased just 2%, highlighting our team's continued positive results from our ongoing intense focus on operating efficiency. We also completed our property insurance renewal on June 1st at premiums of approximately 27% below last year, or $6 million lower, which was better than we anticipated, and a nice tailwind through next May. A more favorable insurance market health, but so did a disciplined program design, and the capital we've invested to harden weather-exposed assets. Now let's turn to capital allocation. The private quarter you won't find in any same property statistic. Despite losing approximately $5 million of hotel interest from hotels we sold and compared it against $3.2 million of prior year business interruption income, adjusted EBITDA declined less than 1% and adjusted FFO dollars were essentially flat. A 4% decrease in diluted share count lifted adjusted FFO per share 4.6%, while retained free cash flow per share after dividends increased nearly 25%. This is what disciplined capital allocation should accomplish. Per share earnings and cash flow growing faster than company earnings despite asset sales. On the investment side, we invested $12.5 million in the portfolio during the quarter, and remain on track for $65 to $75 million for the full year. This lower capital requirement converts more of our earnings into retained free cash flow for debt reduction and opportunistic repurchases of our common and preferred shares. During the quarter, we sold the Chamberlain West Hollywood Hotel for $43.5 million and used $26.1 million of the proceeds to retire $33.7 million in preferred shares at a 23% discount. that single transaction generated approximately $7.6 million of immediate value accretion and eliminated over $2 million of annual preferred distribution. And over the last eight months, we've sold three hotels for just shy of $160 million and an aggregate 15.4 times even the multiple and a 4.6% NOI cap rate. These sales, as the ones before, continue to validate the portfolio's private market value. The value creation playbook is simple. sell hotels at higher private market values and use the proceeds to reduce debt and buy back common preferred securities at prices below their underlying value. During the first half, we repurchased 0.9 million common shares at an average price of $13.52 and retired 1.5 million preferred shares at an average 23% discount for liquidation preference. Our balance sheet also continues to improve. Net debt, the trailing 12-month corporate EBITDA, declined to 5.3 times, from 5.5 times at the end of Q1, and 5.9 times at the end of 2025. We ended the quarter with $270 million of cash, $641 million of revolver availability, and $90 million of delayed draw term capacity, or a total of $1 billion of liquidity. Remaining $350 million of the 2026 convertible notes are fully funded Existing cash, expected free cash flow, and term loan capacity. And we have no other debt maturities until 2028. Stepping back, the first half demonstrates two forms of compounding. Operating leverage of the hotels and disciplined capital allocation at the corporate level. Same property hotel revenues increased 7.2%. Same property hotel EBITDA grew 14.5%. Adjusted FFO per share improved 23.8%. and free cash flow per share surged 69%, 76 cents or $87.8 million. Each layer amplified the one before. And with that, I'd like to turn the call over to Jon for more color on current demand trends, event-related business, our markets, and the outlook for the balance of 2026. Jon?

Thanks, Ray. Since Ray covered our second quarter performance in detail, I thought I'd step back provide a more high-level view of both the industry and Pebble Brook. So let's start with the industry's performance in the second quarter. As a reminder, the industry setup was very favorable in Q2. Benefits we expected from a better holiday calendar, a uniquely active major events calendar, and a reconnection between GDP growth and industry demand growth, they all occurred in the second quarter. Going into the quarter, Our concern revolves around the potential for geopolitical or policy events that would negatively impact the economy and travel. Fortunately, the conflict in the Middle East and constantly changing trade policies have not yet had a negative impact on the economy or U.S. travel in general so far this year. As a result, industry demand growth was healthy in the quarter. and with real new supply being added, occupancies rose and ADR growth accelerated due to the better setup, more compression days, less price sensitivity by higher end customers in particular, all of which led to more pricing confidence. All of the major hotel demand segments remained favorable. Group, corporate transient and leisure travel all grew weekdays and weekends alike. We even saw the international travel balance improve in June. Inbound travel turned positive for the first time in quite a while, presumably helped by World Cup visitors, while outbound travel declined. Both sides of that provide benefits for U.S. hotels, more foreign visitors coming in and more Americans staying home. For Pebble Brook, as Ray described in detail, we saw the same industry benefits in Q2 and more, even though we had soft convention calendars in a number of our major markets. During the second quarter, in the quarter, for the quarter pickup was very strong, exceeding last year by $8.4 million. We haven't seen any increase in group cancellations or attrition, and attendance levels for group meetings have been more predictable than last year. We continue to watch for signs of weakening, but pickup in and for the month, quarter and year has remained favorable. World Cup delivered a modest benefit to room revenues. We estimate an increase of between $1.5 and $2.5 million, or roughly 60 to 100 basis points for the quarter in RevPAR. The incremental World Cup demand was largely offset by corporate group and transient business that stayed away due to higher rates and many booking restrictions. So the net room benefit came primarily from rate, not occupancy. This also explains the slight June occupancy dip Ray mentioned. The change in mix from group to transient unfortunately also had a negative impact on food and beverage revenues in our match markets, particularly banquet and catering, which declined on a year-over-year basis and offset much of the room revenue gain. In total, we estimate the net benefit to Hotel Ibiza from World Cup was between $500,000 and $1 million, a relatively minor benefit overall, for the benefit nonetheless. Turning back to the industry outlook, with a strong economy that remains resilient, and with corporate profit growth at high levels and accelerating, there are fundamental reasons to be encouraged about positive industry trends continuing in the second half of this year. However, we remain concerned about potential negative impacts from the protracted and widening Middle East conflict policy changes and geopolitical instability, and the real possibility of another potential government shutdown this fall. Given the strong operating performance in Q2 and with July continuing that trend, we're increasing our industry rep part growth outlook to a range of 3.5% to 4.5%. As we look out beyond this year, We believe we're at the beginning of a strong multi-year upcycle for the hotel industry. I think we can now confidently forecast that supply should remain very limited through most of the rest of this decade. We're at the beginning of a major multi-year capital investment cycle related to both AI and the reshoring of manufacturing. And we have another huge business investment cycle right behind this one with the creation and build-out of the robotics industry. We also expect very significant and growing benefits from the massive wealth that has been created over the last 15 years for both investors and employees and from the largest transfer of wealth in global history as the baby boomers begin to pass on the wealth they've amassed. We believe the prospects for healthy multi-year demand growth have never been stronger or clearer in the last 30 years, nor has supply growth been so limited at the same time. These are incredibly positive multi-year fundamentals. The multi-year setup is very good, just like this year's setup was very good. Of course, a lot of things could still go wrong as they did last year. Before turning to our Q3 and updated full-year outlook, I want to spend a few minutes on why we're increasingly constructive about 2027 and the broader multi-year setup. For 2027, we believe these strong demand and supply fundamentals should outweigh any headwinds related to difficult comparisons to this year's numbers. There are a number of reasons for this view. First, we expect the economy to remain strong and potentially accelerate Thank you for joining us. Jon Bortz, Thomas Charles Fisher We ultimately expect the international inbound-outbound travel imbalance to reverse, and it could occur next year if the positive experiences foreign travelers had at the World Cup and traveling throughout the U.S. and the very favorable media coverage of the World Cup activities translate as they normally do into increased future travel to the host country. A more positive impression of the U.S., compared to all the previous negative media about our country should help increase travel to the U.S. from abroad. For Pebble Brook in 2027, we should continue to see significant growth from the recoveries in our urban markets led by San Francisco and Los Angeles coupled with more favorable convention calendars in San Diego and Boston that are expected to significantly improve the performance We also have a number of significant events next year, including the Super Bowl moving from San Francisco to Los Angeles, NCAA men's basketball regional finals in L.A., the NFL draft in Washington, D.C., the Star Wars 50th anniversary celebration in L.A., the Major League Baseball All-Star Game in Chicago, and a significant amount of of expected pre-Olympic travel into LA. We should also see further upside from our redeveloped properties as they gain additional share. And finally, our resorts should benefit from the ongoing K-shaped economy and the growing wealth of the higher-end consumer. While the Super Bowl won't be in San Francisco next year, we continue to expect strong rev-par growth in the city as city-wise continue to return, albeit at lower rates than the Super Bowl, and corporate transient travel should grow significantly at higher rates as corporate growth in San Francisco continues to boom. We also expect leisure travel to see further increases as the impression of the city's environment has turned positive over the last year, and the city has been a showcase this year during major events. Turning back to this year, Q3 is off to a great start, with July proving to be stronger than we expected. Short-term pickup has surprised to the upside, and we think this indicates that summer vacation travel is starting strong, continuing the positive leisure trends from Q2. Having July 4th fall on a Saturday provided a big lift to our portfolio overall. and probably a much bigger lift than the weekend-related America 250 events. Group pace for the third quarter is also favorable. Corporate travel growth remains strong and leisure travel is accelerating and allowing us to average higher prices through less discounting, fewer promotions and reduced use of lower-priced wholesale channels. Based on preliminary results through the 25th, July RevCar is on pace to grow between 7% and 8% over last year. However, we're not prepared to extrapolate July's unusually strong short-term pickup across the entire quarter. Our Q3 range preserves a prudent allowance for shorter booking windows, potential macroeconomic and policy-related volatility, and the impact of geopolitical events. For Q3, our outlook assumes same property rev car growth of 1 to 3%, same property hotel EBITDA of $100.5 million to $104.5 million, adjusted EBITDA of $92.5 million to $96.5 million, and adjusted FFO per share of 48 to 52 cents. When we look at our pace for the second half of the year, As of the end of June, room revenues were pacing ahead of same time last year by 5.5%, which is a total of $10.7 million. About 80% of this revenue pace advantage is being driven by transient, with the remaining 20% in group. If pickup for the second half of the year equals last year's pickup, It would translate to rev part growth equal to roughly 2.4% in the second half. To put these numbers in perspective, our current nominal pace advantage is in line with the high end of our implied rev part growth outlook for the second half of the year. So if pickup in the second half runs ahead of last year, then we would exceed our outlook by the higher pickup. Recall that last year, with everything that happened, we lost Pace Advantage as the year progressed and finished down for the year in room revenue. Speaking of our outlook, we're raising our full year outlook to reflect the second quarter outperformance while maintaining our prior assumptions for the second half. With the increased outlook, we're now forecasting same property rev par growth for the year of 4.5 to 5.5%, an increase of 125 basis points at the midpoint. We're also forecasting same property EBITDA growth of 8.2% to 10.5%, with the midpoint at 9.3%, a healthy increase for the year and a material step-up from our prior outlook. These increases translate into an adjusted FFO outlook of $1.69 to $1.76 per diluted share, an increase of 8 cents at the midpoint, with a similar increase in our free cash flow outlook. As I indicated earlier, but worth repeating, current trends remain favorable, but booking windows remain short, and the geopolitical policy and macroeconomic environment remains uncertain. We're encouraged by the industry trends we've been seeing but we're not yet comfortable assuming visibility we don't yet have. We'll continue to take the year one quarter at a time and if there's no material impact from geopolitical policy or other macroeconomic events then we should keep performing favorably to our outlook just as we have in the first half.