Pebblebrook Hotel Trust executives anticipate positive year-over-year booking pace to continue across its hotel portfolio for the remainder of 2023.
During the hotel real estate investment trust’s second-quarter earnings call, Pebblebrook Chairman and CEO Jon Bortz said the company has not observed any meaningful increase in cancellations or attrition in the third quarter. That would be one of the first indicators of slowing demand caused by broader macroeconomic issues.
Pebblebrook forecasts occupancy in the third quarter will continue to increase over last year by as much as 2 to 3 percentage points, Bortz said. However, it’s likely that average daily rates will drop similar to how they did in the second quarter and for similar reasons.
Total revenue pace for the third quarter is up by 5.9% with combined group and transient room nights up by 7.9% and ADR up by 1.9%, he said.
“We believe this revenue pace advantage is likely to shrink over the course of the quarter, and some transient and group [travelers] have likely booked further out, potentially having less to book on a shorter-term basis,” he said.
Pebblebrook’s third-quarter outlook projects same-property RevPAR to range between down 2% to up 1% over third-quarter 2022, Bortz said. It will still likely be ahead of 2019, however. The company expects gains in occupancy compared to last year, slightly offset by declines in ADR.
The forecast includes the last of the disruptions from its redevelopment of Hotel Solamar to the Margaritaville Hotel Gaslamp Quarter San Diego, which is slated to be substantially complete and reflagged in mid-August. The company is also factoring in the potential negative effects of the Hollywood writers’ strike for its Los Angeles-area hotels.
The pace of fourth-quarter bookings continues to exhibit the strongest quarterly year-over-year growth, Bortz said.
“Should the economy continue to hold up, [the fourth quarter] should be our strongest growth quarter of the year compared to last year, outside of the first quarter with easy omicron comps,” he said.
For the fourth quarter, total revenue pace is ahead of where it was at this time last year by 35% with room nights ahead by more than 25% and ADR up by almost 8%, he said. There’s standout pace growth in San Francisco, San Diego, Boston and Washington, D.C. Group for the quarter is ahead of this time last year by more than 42%.
Second-Quarter Trends
Group business continued to recover in the second quarter, Bortz said. Group room nights across the portfolio were 2.7% up over last year, and average daily rate increased by 4.7%, resulting in total group revenue growing by 7.5%. Transient revenue was down 2.3% compared to last year, but room nights increased substantially. The drop was mainly due to fewer guests splurging on premium rooms this year.
Year to date, resort rates dropped by 10.4%, but they are still at a 40.4% premium, roughly $111.89, over rates in the first half of 2019, he said. Some of the ADR and revenue per available room gains are a direct result of the competitive share gains due to capital reinvestments made over the years to reposition the properties higher in their markets.
Pebblebrook’s total portfolio gained RevPAR share in the second quarter by 66 basis points, even with the approximate 180-basis-point negative effect on performance caused by its five hotel redevelopment projects, he said.
The industrywide flattening of weekday demand during the second quarter is a good indicator that the business travel recovery continues, though at a more gradual pace, Bortz said. Weekend demand was down year over year in every month this quarter.
That weekend drop is likely because leisure travelers are more comfortable traveling abroad and taking cruises, he said.
“We believe this represents the same sort of revenge travel that benefited the domestic hotel business last year,” he said, adding he expects that will normalize later this year and next year.
The other reason is that the year-over-year comparisons now are measured against the omicron-related rebookings made in the second quarter of last year, he said. Easier comparisons are nearing as the most recent numbers from CoStar show that occupancy for the industry is ahead of last July month to date.
Capital Improvements
Pebblebrook completed $52.5 million of reinvestment across its portfolio, excluding the cost of repair work of its LaPlaya Beach Resort from damage caused by Hurricane Ian, according to the earnings report. The completed work includes the redeveloping and repositioning of the Viceroy Santa Monica Hotel, the Jekyll Island Club Resort, Estancia La Jolla Hotel & Spa, the Hilton San Diego Gaslamp Quarter. That also includes the transformation of the Hotel Solamar into the Margaritaville Hotel San Diego Gaslamp Quarter.
In July, the company started renovation of four guest houses with 50 rooms/suites at Southernmost Beach Resort in Key West, Florida. The redevelopment and repositioning of the Newport Harbor Island Resort is expected to begin in the fourth quarter and finish in the second quarter of 2024.
Overall, Pebblebrook expects to invest between $145 million and $155 million in capital improvements, not including LaPlaya.
The company has started made progress on its restoration and reopening of the LaPlaya resort. The Bay Tower and Gulf Tower are substantially restored, and both are fully operational with additional services and amenities coming online. The company expects the Beach House will be completed and reopened by the end of the year.
Most of the disruptions caused by these renovations and repositioning projects are done, Bortz said. The company expects about $1 million in earnings before interest, taxes, depreciation and amortization impact in the third quarter, most of it coming from finishing the conversion of Hotel Solamar.
“With the completion of these projects, we’re just about finished with the strategic redevelopment program within the portfolio that came out of the opportunistic acquisition of LaSalle [Hotel Properties] and several opportunistic resort acquisitions we’ve made in the last two years,” he said.
Pebblebrook expects to gain share in its markets due to these repositioning projects while competitors in the market continue to need capital investments, Bortz said.
“We effectively have a newly redeveloped, repositioned and re-merchandised portfolio that should outperform its competition,” he said. “We're in markets that still have significant upside recovering from the negative impact from the pandemic and will be in a highly supply-constrained environment for years to come.”
By the Numbers
For the second quarter, Pebblebrook reported net income of $46.2 million, up from $22.8 million in the second quarter of 2022.
Same-property EBITDA was approximately $110.7 million with adjusted EBITDA for real estate of $116.2 million.
Same-property occupancy grew 4.6% year over year to 73.2% while same-property ADR dipped 4.5% to $307.65. As a result, same-property RevPAR remained flat at $225.25. Same-property total RevPAR grew by 0.6% to $343.66.
During the quarter, Pebblebrook closed on the sale of two properties, according to its earnings release. It sold the 189-room Hotel Monaco Seattle for $63 million and 125-room Hotel Vintage Seattle for $33 million. Year to date, the company has completed $232.3 million in property sales.
As of the end of the quarter, the REIT had $823.7 million in liquidity, comprising $186.3 million in cash, cash equivalents and restricted cash as well as $637.4 million in its senior unsecured revolving credit facility.
Pebblebrook’s $2.4 billion of consolidated debt and convertible notes has an effective weighted-average interest rate of 4.3%. Approximately 91% of its outstanding debt is unsecured, and the weighted-average maturity is 2.8 years. It does not have any meaningful debt maturities until the fourth quarter of 2024.
As of press time, the company’s stock was trading at $15.19, an increase of 13.4% year to date. The NYSE Composite Index was up 7.8% for the same period.