Though business travel was slowed by the omicron variant of COVID-19 just months ago, Pebblebrook Hotel Trust executives now believe that the segment is coming back strong.
Overall demand is recovering from its pullback in January, showing dramatic improvements in recent months with business travel noticeably improving, Chairman, President and CEO Jon Bortz said during the hotel real estate investment trust's first quarter earnings call.
Citywide events and business group meetings of all sizes are taking place, he said. Attendance at these events is improving, and the spend per person is strong. In a positive sign for future demand, group lead volume, site tours and forward bookings continue to grow at Pebblebrook’s hotels. In many cases, group leads and bookings are coming in at higher levels and with higher rates compared to the same time in 2019.
“These substantial and rapid improvements in business travel have led to significant gains in both our urban occupancy levels and average daily rate,” he said.
Excluding the Hotel Vitale, which has been closed during its repositioning to One Hotel San Francisco, the REIT’s occupancy for its urban portfolio increased from 32% in January to 47% in February and then to 59% in March, Bortz said. Through April 24, occupancy grew to 64%. ADR has climbed each month as well, increasing from $198 in January to $256 so far in April.
“These occupancy levels are still well below 2019 levels, and with lots of pent-up business demand, we have significant occupancy growth to recover to drive higher operating performance,” he said.
Urban markets that were slower to recover have been gaining occupancy rapidly through April, he said. Washington, D.C., had an occupancy rate of 39% in March that grew to 62% through April 24. In that same time period, Seattle’s grew from 45% to 53% and San Francisco from 36% to 41%.
Given the average rate during the first quarter, leisure and business guests continue to show no price sensitivity, he said.
“We’re very optimistic about an accelerating recovery in business travel over the next three to four months, and as indicated, we're already seeing it in the second quarter,” he said. “We're extremely excited about the potential growth in occupancy and rate over the next few years with limited construction starts and supply growth for the next few years.”
Resort Demand
Pebblebrook’s resorts saw ADR grow 29.1% from the previous quarter and 59.4% compared to the first quarter of 2019, said Raymond Martz, executive vice president and chief financial officer. Its L’Auberge Del Mar in Del Mar, California, led the resort portfolio with rate growth of $359.
Each of these resorts had been recently renovated and gained ADR share, he said. Across its resorts, Pebblebrook generated 13.4% higher non-room revenue per occupied room during the quarter compared to 2019, demonstrating its ability to drive non-room spending even with business and group levels below 2019 levels.
“These results underscored the financial benefits we're beginning to receive by dramatically enhancing the quality of the overall guest experience at these properties, both physically and operationally,” he said.
The company’s resorts, including the Margaritaville Hollywood Beach, Estancia Ja Jolla Hotel & Spa and Jekyll Island Club Resort acquisitions, are on pace to exceed their earnings before interest, taxes, depreciation and amortization in 2019, Bortz said. During the quarter, the 11 resorts combined achieved $45.4 million of EBITDA, a $12.1 million or 36% increase over the first quarter of 2019.
The current forecast for these resorts projects 2022 EBITDA will exceed their 2019 EBITDA by $50 million to $60 million by reaching total EBITDA of between $169 million and $179 million, he said.
“We continue to be very focused on taking advantage of pricing power and a lack of pricing resistance, not just for rooms but for [food and beverage], banquets and catering, parking, resort fees and service and administrative charges,” he said. “We continue to see very strong spend by business groups and leisure guests, and we expect this will continue throughout the year.”
Portfolio Management
Pebblebrook recently announced its pending acquisition of the 119-room Inn on Fifth in Naples, Florida, for $156 million. The company expects to close on the luxury property later in the second quarter, Martz said. It will retain Noble House Resorts for operations, and the management company also operates Pebblebrook’s nearby LaPlaya Beach Resort & Club.
This deal comes after the REIT’s four acquisitions last year, which Bortz said have all exceeded their underwriting. While Pebblebrook hasn’t owned them for a full 12 months, the trailing 12-months and net operating income yields “are terrific,” he said.
The Margaritaville Hollywood Beach acquired in October has had a 9.1% NOI yield while the Jekyll Island property that was bought in July has had an 8.5% NOI yield, he said. The Estancia La Jolla, bought Dec. 1, has yielded 5.5%.
“We expect all of these returns to be higher by the end of 2022,” he said. “While these improved results do include some of the benefits from the many operating changes we've already implemented with our operators, these returns are all before the [return on investment] from the physical improvements we’re planning that will reposition these properties higher.”
Since 2018, Pebblebrook has invested $350 million in transformational redevelopment and renovation projects at 25 hotels, 16 of which were part of the LaSalle Hotel Properties acquisition, Bortz said. Those improvements have been in place, but the company is just beginning to see the returns on those investments.
“We’re increasingly excited about the improved performance of these properties as demand returns,” he said. “Their increased performance will substantially increase our growth rate over the next few years.”
Through Pebblebrook’s capital improvement program, the company invested approximately $20 million in its portfolio during the quarter, Martz said. That included completing the renovation and conversion of its Hotel Grafton on the Sunset Strip in West Hollywood to Hotel Ziggy. The company is working on the redevelopment and reopening of its Hotel Vitale into One Hotel San Francisco, which should open later this quarter.
The company is on track to invest between $100 million and $120 million into the portfolio this year with about $80 million targeted for return-on-investment redevelopment projects that should generate cash returns of 10% or higher as the hotels stabilize over the next two to three years, he said.
The REIT’s upcoming major projects include the $22 million total redevelopment of the Solamar Hotel in San Diego into the Margaritaville San Diego Gaslamp District, a move the REIT's leaders was driven to make in part due to the performance of the Margaritaville property in Florida, Bortz said. In October, the $20 million renovation of the Hilton San Diego Gaslamp Quarter will begin to evolve the property into a lifestyle Hilton property with outdoor areas, great views and unique architecture.
“We expect our transformed Hilton and Margaritaville will lead the market in rate and [revenue per available room] as they stabilize over the next few years,” he said.
Pebblebrook is currently planning the extensive redevelopments of its Jekyll Island and Estancia properties, but the scope of these projects is not yet finalized, Bortz said. It’s also planning to complete this winter the second and final phase of its project to reinvigorate the Viceroy Santa Monica.
There are also two major multiyear projects the company has been working on: the master planning of unused acreage at its Skamania Lodge in the Columbia River Gorge in Washington state and the Chaminade Resort in Santa Cruz, California.
“With the incredible success of the outdoor pavilion and six tree houses we added at Skamania in the last five years and the trend to consumers looking for increasingly experiential lodging alternatives, we believe we have the potential to add as many as a couple hundred units of alternative lodging at each property,” Bortz said.
By the Numbers
Pebblebrook reported a net loss of $100.2 million during the first quarter, according to the company’s earnings release. Its adjusted EBITDA for real estate was $46.5 million, a 50.3% recovery compared to 2019 levels.
Same-property RevPAR was $143.61, down 23.4% compared to the first quarter of 2019, but ADR was $297.29, up by 19.4% during the same period. Same-property total revenue amounted to $258 million, a recovery of 76.8% compared to 2019.
At the end of the quarter, the company had $96 million of consolidated cash, cash equivalents and restricted cash along with $598.4 million of undrawn availability on its senior unsecured revolving credit facility. That combines for total liquidity of $694.4 million.
As of press time, Pebblebrook’s stock was trading at $25.17, up 12.12% year to date. The NYSE Composite Index was down 8.3% for the same time period.