NEW YORK — Branded hotels give owners a sense of stability and security, but they also come with rules and limitations.
In an audio interview at the 2023 NYU International Hospitality Industry Investment Conference, Pebblebrook Hotel Trust Co-President and Chief Financial Officer Ray Martz said the freedom to be creative with independent and lifestyle hotels, along with their ability to drive profits, make them appealing investments for his company.
Every other publicly traded hotel real estate investment trust has its own focus with what it does best, and many hotel REIT executives come from a brand environment, he said. That’s why those REITs’ portfolios are full of branded hotels.
Pebblebrook’s team comes from an investor standpoint, so executives are more generalists in the hotel space, he said. Through cultivation over time, the company’s leaders have found that with the right property and location, the independent, lifestyle hotels can perform better for the bottom line. It requires putting in the necessary capital in the correct areas and working with the right management company and figuring out the right on-property team as well.
“But it's a lot more fun to have some of those properties,” he said. “They’re definitely unique in all regards, and we have a lot more flexibility of what we can do versus if we have a brand. Nothing against the brands — they do a great job, and we have several brands in our portfolio, but you have to follow the box.
“If you're in the box, great — you can't go outside of the box. Whereas with the lifestyle hotels, we can kind of do whatever we want.”
Click here to listen to the full podcast.
As with the rest of the hotel industry, leisure demand led the recovery across Pebblebrook’s portfolio, Martz said. The REIT’s resort properties and those in the Sunbelt states have been performing better than its urban properties.
During the pandemic, the company focused its acquisition strategy on resort and leisure-driven properties to balance out its overall demand mix, he said. Pebblebrook acquired the Margaritaville Hollywood Beach Resort, the Jekyll Island Club Resort, the Estancia La Jolla Hotel & Spa, the Newport Harbor Island Resort and the Inn on Fifth in Naples.
“We pivoted the portfolio to really now an equal focus of leisure versus business, and in a way resort and urban versus where we were pre-pandemic, which is more of a 60/40 bend toward business versus leisure,” he said.
In recent months, however, Pebblebrook has been quiet on the acquisition front. With the discount of its share price to its net asset value, the better asset allocation strategy for the company is to sell assets at market and use some of that capital to reduce debt and some to repurchase shares at 50 cents on the dollar value over asset, Martz said. The company will continue to take advantage of that public-private arbitrage existing in the market similar to what happened in 2016 and 2017, when the REIT was trading at a big discount.
There was a fear at the time of a recession that never materialized, and there’s fear that a recession may happen in the second half of this year or the beginning of 2024, he said. That has created a disconnect with the company’s net asset value, but as that gap narrows, it will consider other opportunities for its capital.
“Right now, for us, it’s more of a disposition-focus to sell at market and buy back shares at a big discount, and we’ll continue to execute on that as long as it lasts,” he said.
Another key part of Pebblebrook’s capital strategy has been reinvesting in its portfolio. The REIT has spent years renovating and repositioning its hotels.
“We always found reinvesting in the portfolio and providing a better guest experience at an elevated quality level generates good [return on investment],” Martz said.
The company had a couple projects it started shortly before the pandemic that have now completed, so the portfolio will be largely renovated after this year, he said. Pebblebrook is investing roughly $150 million in capital projects this year. That includes its two headline projects — the Hilton San Diego Gaslamp Quarter and converting the Hotel Solamar to Margaritaville Hotel San Diego Gaslamp Quarter — as well as the Jekyll Island Club Resort, the Viceroy Santa Monica Hotel and the Estancia La Jolla Hotel & Spa, among others.
“Right now, we like where our portfolio is at,” he said. “After this year, all the heavy lifting will be done. The amount of capital that we’ll need to invest will be a minimal level over the next several years, and we should start getting the benefits of all these capital investments that we’ve made over the last several years but some of it was put on hold because of the pandemic.”