LOS ANGELES — Since 2018, Pebblebrook Hotel Trust has invested about $523 million into renovating and repositioning its portfolio.
Now, with those capital-expenditure projects either completed or wrapping up, it’s time to ramp up and stabilize those hotels, said Jon Bortz, chairman and CEO of the hotel-focused real estate investment trust.
“We invested the dollars in those redevelopments, but now we need to get the increased performance, the return on those dollars,” he said in an interview with HNN.
For example, the focus in working with the operating team after the conversion of the Hotel Solamar in San Diego to the Margaritaville Hotel San Diego Gaslamp Quarter as it ramps up over the next three to four years, he said. To be on the right path, that means getting people out to see the property who will then book the property. That may be a year out, but it’s building the business.
“We're getting the exposure. We need the visibility. We need to show people what we did, right?” he said. “You can have a renovation, but if you don't tell anybody and you don't get anyone there, it's like, does the tree make any sound?”
Another major focus is seeing how Pebblebrook can work with its operating partners to control costs at its hotels, Bortz said. Wage rates will continue to grow faster than revenue grows, and that could be compounded by further complications with general labor availability given concerns over new immigration policies and deportations.
Aside from when union contracts prohibit it, Pebblebrook’s management partners use E-Verify when hiring, so that should mean its employees there are legally allowed to work, he said.
Generally, the hotel industry needs to find other ways to do business and harness the advances in technology, namely artificial intelligence and robotics, he said. They’re already being used in a small way, but they’re likely advancing quickly.
“We have to take cost out in order to make the business model work,” he said.
Insurance costs have been an issue, but initial indications suggest commercial insurance rates should decrease this year, he said. The commercial market is different than residential, as there are different insurers in many cases. Evidently, 2024 wasn’t as big a disaster year for the commercial insurers, and they had a good stock market year for capital returns.
From the portfolio strategy perspective, Pebblebrook is a gross seller right now, Bortz said. The REIT’s stock is trading at a 40% to 50% discount to what the executive team believes the underlying assets are worth on a private basis. The company has sold several hotels and resorts over the years, and it’s been able to do so within the range it has built its net asset value off of.
If the hotel transaction market gets more active and there’s more conviction on the buyer side, Bortz said he would like to see more transactions this year. The debt markets have stabilized, and debt is available, but there may be some trouble if there’s no yield.
In 2023, Pebblebrook sold seven hotels for about $331 million in gross proceeds, which it used to pay down outstanding debt and repurchase shares. In 2024, the company didn’t sell one hotel.
“We didn’t do any last year because the transaction market was just very difficult, and the buy side didn’t have conviction,” he said.
Two things are critical to getting an active market again, Bortz said. One is debt availability, which there is now through several sources. That helps to shrink the spreads, because even if base interest rates aren’t going down, the spreads can narrow because there’s a lot of capital for debt.
The other critical factor is the need to show accelerating revenue growth and, hopefully, bottom-line growth, he said.
“We think we’re very close to that,” he said.
Hotel industry data shows there was an 18-month period from March 2023 to September 2024 where demand was flat, Bortz said. The U.S. gross domestic product averaged to about 2.5% over that period of time, and demand typically aligns with GDP.
Travel demand has mostly normalized now, he said. People are taking trips again. Cruises are back online. Businesses are having people come back to the office and travel more. Booking patterns are returning to normal as the booking window lengthens.
Data from October, November and December show positive demand growth across the industry with average daily rate growth on top of that, he said. It was consistent with economic growth.
“Now, three months doesn't make a trend, right? Let's see if that continues to play out,” he said. “It looks like January is playing out in a similar way. I think [revenue per available room] growth is going to surprise to the upside.”
Bortz said travel demand is reconnecting with economic growth, and if it grows at 2.5% this year, which is the midrange of the economic forecast, the hotel industry should see 2.5% occupancy growth. As the year goes on and demand exceeds supply, hotels can grow without stealing growth from a competitor. Pricing can become more confident.
These two factors can lead to a much more active transaction market as people get excited about growth and fear missing out on the opportunity, Bortz said. Pricing is fairly low on a per-key basis. The yields hotels trade at are much higher compared to other types of real estate on a relative basis. There’s a lot of capital still sitting on the sidelines.
“Some are saying they are going to be active, but they said that last year, too, and the year before and the year before,” he said. “You’ve got to have conviction.”
The debt piece is in place, he said. If the industry can show accelerating growth, and history shows it can achieve mid- to upper-single digit RevPAR growth without supply growth, companies can grow their bottom lines.