Though the omicron variant dampened the recovery over the past few months, executives at Pebblebrook Hotel Trust said they hotel demand is quickly bouncing back.
Hotel demand has been firm since the pullback in January, Pebblebrook President, CEO and Chairman Jon Bortz said during the hotel real estate investment trust’s fourth quarter and full-year earnings call. Business travel took a brief break in January from its material recovery in the fourth quarter, but it’s noticeably improving. Citywide events and larger business group meetings are happening. Group lead volume, tours and bookings have increased over the past few weeks.
Most groups that canceled for January and February have rebooked and at higher rates, he said. February is turning out better than previously expected, especially the last half of the month. Bookings for March have also accelerated in the past two weeks.
The company expects same-property revenue for the first quarter of 2022 will be down between 25% and 28% compared to 2019, he said.
“We're seeing a significant increase in business transient and group travel as omicron recedes and masking and vaccine mandates are relaxed or eliminated,” he said. “We believe there is significant pent-up business demand to aid a continuing robust level of leisure demand, and there is currently little to no price sensitivity from either leisure or business customers.”
Bortz said Pebblebrook is very optimistic about the accelerating recovery in business travel over the next three to four months, and there are signs of it already in March and April. Similarly, executives are excited about the potential to grow occupancy and rate over the next few years.
As of press time, Pebblebrook's stock was trading at $22.39, flat year to date. The NYSE Composite Index was down 7% for the same period.
Performance
For the year, Pebblebrook reported a net loss of $186.4 million, which was an increase from a net loss of $392.6 million in 2020, according to the company's earnings release. Total revenue was $733 million, up from $442.8 million in 2020.
Throughout 2021, Pebblebrook’s same-property hotel revenue increased by more than $280 million, a 65% increase over 2020, said Raymond Martz, executive vice president and chief financial officer.
Hotel earnings before interest, taxes, depreciation and amortization was $132.1 million in 2021, a turnaround from hotel EBITDA of negative $27.5 million in 2020.
Similarly, the company finished the year with adjusted EBITDA for real estate of $88.3 million, compared to a loss of $66.7 million in 2020.
In the fourth quarter, same-property total revenue totaled $245.4 million, 29% below the comparable period in 2019, its best quarter since the pandemic, Martz said.
“This strength was driven by continued robust demand at our resorts and further improvements in business travel, both group and transient,” he said.
On the capital side, Pebblebrook raised more than $740 million in 2021, increasing its liquidity and acquisition capacity. It replaced $250 million of preferred equity with less expensive preferred shares, saving $1.8 million in rolling preferred dividends. The company also extended more than $1 billion of debt maturities, enhancing its liquidity and eliminating any significant debt maturities until late 2023.
By the end of the year, the company had $730 million of liquidity, including $92 million cash on hand and its undrawn $650 million unsecured credit facility.
Total revenue from resorts climbed to 11% higher than 2019’s fourth quarter, primarily due to higher room rates, which were up 43% compared to 2019, Martz said. Performance of the company's urban hotels continues improve, but revenue at those properties was down 44% compared to 2019, which still marked the best performance since the pandemic started.
December performance was negatively affected by rising COVID-19 cases due to the omicron variant. Same-property total revenue was down 18% compared to December 2019, which was still the company’s best monthly performance since the start of the pandemic, Martz said. Same-property average daily rate was up 20% compared to December 2019.
“Our monthly same-property ADR exceeded the comparable month in 2019 four of the last six months in 2021 despite the disruption caused by the delta and omicron variants,” Martz said. “This highlights the increased ability of our portfolio to surpass 2019 ADR throughout 2022 earlier than we thought possible just a few months ago, and we are increasingly confident we will reach 2019 hotel EBITDA levels later in 2022.”
However, these expectations presume no additional significant COVID-19 waves, he said.
Portfolio Management
Pebblebrook sold two hotels in San Francisco and another in Manhattan for more than $270 million, Martz said. The company invested the proceeds and more into $492 million in acquisitions of four leisure-focused resorts with significant upside opportunities, he said.
The company’s acquisitions have far exceeded its underwriting, Bortz said. The Margaritaville Hollywood Beach Resort in Hollywood, Florida, has produced a 7.2% net operating income yield while the Jekyll Island Club Resort in Jekyll Island, Georgia has produced an 8% NOI yield. The Estancia La Jolla Hotel & Spa in San Diego, acquired on Dec. 1, 2021, has already produced a 3.4% NOI yield.
Looking at the trailing 12 months through the first quarter of this year, the company forecasts Margaritaville at 8.4% NOI, Jekyll Island at 8% and Estancia at 4.6%, he said.
“This is all before any physical improvements, but it does include benefits from operating changes we’ve already implemented with our operators,” he said.
Limited new supply coming in over the next three to four years, particularly in cities and resort markets, will provide a long runway for occupancy and rate growth, Bortz said. Hotel starts are at low levels and will be for another year, and rooms under construction are declining while development costs have climbed dramatically. Any large new hotel development, such as an urban high-rise hotel or a resort, will take 36 to 42 months to complete.
Replacement costs have grown significantly from pre-pandemic levels, up 25% to 35% and 20%-plus in 2021 alone, he said. Pebblebrook’s team has estimated the portfolio’s replacement costs have increased to between $700,000 and $750,000 per key.
Renovations
Through the year, Pebblebrook completed $83.8 million in capital investments and redevelopment projects, Martz said. That includes six renovation and re-merchandising projects representing $53.4 million of the capital invested in 2021.
“We expect these projects to generate 10% or better returns as demand returns and performance stabilizes over the next two to three years,” he said.
The company plans $100 million to $120 million in capital investments, $80 million of which accounts for major redevelopments and smaller return-on-investment projects, he said. There will be eight significant renovation and redevelopment projects underway or starting later this year, including the transformation of Hotel Vitale to One Hotel San Francisco, Grafton on Sunset in West Hollywood to Hotel Ziggy and Solamar Hotel to Margaritaville San Diego Gaslamp District.
The company will also start on major repositioning projects of its newly acquired Jekyll Island Club Resort in Jekyll Island, Georgia, and Estancia La Jolla Hotel & Spa in San Diego this year.
Pebblebrook has invested about $350 million in renovation and redevelopment projects at 25 properties since 2018, including 16 properties from its acquisition of hotel REIT LaSalle Hotel Properties in 2018.
“This is a big deal and was a lot of work,” Bortz said. “The increased performance from these projects will substantially increase our performance over the next few years, and we’re already seeing it at our resorts where we’ve seen demand recover.”
Along with its major renovation projects, Pebblebrook has a number of smaller ROI projects planned, he said. That includes converting the rooftop pool at the Revere Hotel Boston Common to additional indoor/outdoor event space and adding a resort pool to the Chaminade Resort & Spa in Santa Cruz to make it a more amenity-focused leisure and group destination.
The company has been working on two multiyear projects, both of which involve the master planning of significant unused acreage at former conference centers: the Skamania Lodge in Columbia River Gorge, Washington, and the Chaminade Resort & Spa, Bortz said.
The company plans to add a couple hundred units of alternative lodging at both properties, including treehouses, glamping, spaces for luxury RVs, cabins, villas, farmhouses and additional outdoor activities, he said.
The Skamania Lodge in Columbia River Gorge, Washington, for example, has had success from the additions of an outdoor pavilion and six treehouses, he said. This year, the property will receive an investment between $10 million and $12 million investment to start adding three more treehouses, five luxury glamping units, a multi-bedroom villa and a large outdoor pavilion to hose additional business and social events.