Demand trends during the third quarter reflected the economic conditions at play, Pebblebrook Hotel Trust's chief executive said.
Speaking during the hotel real estate investment trust's third-quarter earnings call, Pebblebrook Chairman and CEO Jon Bortz said business group demand and business-transient demand continued to grow while leisure demand, though healthy, was flat year over year.
The company's hotels experienced a noticeable difference in demand across price segments, with stronger performance at the upper end compared to the mid- and lower-tier segments, he said.
“We believe this is largely due to economic pressures impacting individuals in lower-income brackets. Pandemic-related governmental support has largely phased out, personal savings have diminished and high credit card interest rates, along with inflation, have created financial strain,” he said.
It’s encouraging, however, that employment remains strong and wage increases in the lower-income group are solidly outpacing inflation, which should provide support for a better 2025, he said.
It’s unusual that hotel demand has remained flat despite healthy gross-domestic-product growth, a trend that has persisted since April, Bortz said. That suggests demand patterns changed significantly during and after the pandemic and have been normalizing over the past 18 months.
“We believe most of this normalization has now occurred and is winding down, positioning the industry favorably for 2025,” he said. “Assuming continued healthy economic growth, as most economists are forecasting, we expect demand growth in 2025 to better align with GDP growth. With supply remaining extremely limited, this should result in healthy occupancy growth next year.”
Performance update
Pebblebrook hasn’t experienced the flattening of demand as its portfolio sits in the upper-upscale and luxury segments, Bortz said. Its hotels and resorts in urban markets continue to regain significant occupancy, with leisure and business-transient demand returning while group bookings grow.
The redevelopment projects that displaced occupancy in the recent past are now complete, and these properties have been regaining market share, he said.
That’s not to say Pebblebrook’s hotels aren’t facing challenges, he said. During the quarter, the cities of San Francisco, Los Angeles and Portland each took a step backward. San Francisco saw a drop in its convention business this year, but the calendar is expected to improve significantly next year.
Los Angeles faced reductions in demand due to the entertainment industry strikes last year and the potential of a strike this past summer, he said. Movie and TV production has started to return gradually, and the trend should accelerate as California's governor announced a doubling of the entertainment production financial incentives next year.
Portland’s recovery has struggled due to quality-of-life challenges that were exacerbated during the pandemic, he said. There have been noticeable improvement lately as local policies have been enacted to promote a safer and cleaner city.
The combined RevPAR for these urban markets declined by 5.7% in the quarter, and Pebblebrook projects a 5.6% decline for the full year, he said. Combined, these three markets present a year-over-year decline in earnings before interest, taxes, depreciation and amortization of more than $17 million for the year.
In contrast, Pebblebrook’s hotels in Boston, San Diego and Chicago grew combined RevPAR by 9.6% in the third quarter, and they are forecast to achieve 8.1% growth for the full year. Combined EBITDA for these hotels is forecast to increase by $15.5 million this year.
“We anticipate that these three slower and later-to-recover urban markets should no longer be a drag on our performance in 2025 and should even become a tailwind next year and beyond,” he said. “In addition, we expect significant further benefits from our recently redeveloped properties throughout our portfolio, which have achieved substantial market share gains in 2024.”
Group pace for the portfolio remains favorable looking ahead to 2025, Bortz said. Group room nights are currently ahead by 6.2% year over year, with average daily rate up by 2.2%. Total group revenue on the books is up 8.5% compared to the same time last year. Combined with transient total room nights, next year’s business on the books is ahead by 12.2%.
Next year should have headwinds turn into tailwinds in three challenging urban markets while its other urban markets continue to see growth, he said. There should be significant share gains from the ramping up of its repositioned properties.
Business transient and business group demand should each continue to grow, he said. Leisure travelers are expected to return to U.S. urban destinations while international inbound travel should increase.
“We believe it's likely that overall hotel industry demand growth will return to its normal historical relationship with GDP growth, leading to higher occupancies as demand growth outpaces a very low level of supply growth,” he said. “Of course, all of this assumes a relatively normal year of economic growth.”
Capital investment
Pebblebrook rebranded its Le Meridien Delfina Santa Monica hotel to the Hyatt Centric Delfina Santa Monica on Sept. 18, and there is $16 million property refresh underway expected to wrap up in the first quarter of 2025, said Raymond Martz, co-president and chief financial officer. The brand transition temporarily disrupted performance in September, but that impact should lessen through the fourth quarter as customer awareness and marketing programs for the new brand drive a strong rebound. Hyatt Hotels Corp. is providing some key money for the renovation.
Pebblebrook will invest a total of $90 million to $95 million in capital projects, net Hyatt key money, across the portfolio in 2024, he said.
Over the past several years, Pebblebrook has completed major redevelopment and repositioning projects for nearly all of its portfolio, Martz said. Since 2018, the company has reinvested roughly $523 million in these projects.
“A majority of the upside remains be realized,” he said. “We're already seeing incremental returns from these investments with many of our recently redeveloped properties outperforming throughout the quarter and year to date.”
Pebblebrook will significantly lower its capital expenditures over the next several years now that these projects are mostly complete, he said.
Looking at recent weather disruptions: The LaPlaya Beach & Golf Resort was damaged by Hurricane Helene and Hurricane Milton. The damage was mainly the result of storm surge water and sand intrusion, affecting about 24 guestrooms in the 79-key beach house building and resort pool complex. The Gulf and Bay Towers sustained minimal damage and were able to fully reopen on Nov. 1.
Through extensive preparation efforts, including positioning a third-party remediation team nearby, Pebblebrook was able to clean up and begin repairs immediately after the storms, Martz said. The pools are targeted to reopen between now and the end of the year once new pool equipment arrives. The upper floors of the beach house should open in the next few months while the ground floor should be ready by the end of the first quarter of 2025.
“Our ability to achieve these targets is based upon receiving all necessary governmental approvals in a timely manner and avoiding supply chain delays for construction material and [furniture, fixtures and equipment],” he said.
By the numbers
Pebblebrook reported net income of $45.1 million during the quarter, according to its earnings release. Same property hotel earnings before interest, taxes, depreciation and amortization reached $110.8 million, down 1% year over year. Adjusted EBITDA for real estate was $112.2 million, down 3.3% compared to last year.
Same-property total revenue per available room grew by 2.7% year over year to $364.36. Within the portfolio, urban properties saw TRevPAR increase by 2.7% while resort properties had 2.5% growth. Urban same-property occupancy grew by 3.7%, driven by strong performance in Chicago, San Diego, Boston and Portland. Resort same-property occupancy increased 5.9% due to higher weekday business group demand and improving weekend leisure travel.
On Oct. 3, Pebblebrook issued $400 million of 6.375% senior notes due October 2029. The company used proceeds from the sale of these notes to pay down $353.3 million across three term loans: $43.3 million on the 2024 term loan, $210 million on the 2025 term loan and $100 million on the 2027 term loan.
On Nov. 1, it extended $185.2 million of its remaining $200 million 2025 term loan from October 2025 to January 2029. It also extended the maturity of $602 million of its $650 million senior unsecured revolving credit facility from October 2027 to October 2029.
Year to date, Pebblebrook has executed $1.5 billion in debt financings and extensions. Because of these refinancings, the company has no meaningful debt maturities until December 2026. The weighted-average maturity of its debt is about 3.2 years.
It has $2.3 billion of consolidated debt and convertible notes with an estimated effective weighted-average interest rate of 4.3%. Roughly 91% of the combined debt and convertible notes is fixed with an estimated weighted-average interest rate of 4% while the remaining 9% is floating with an estimated weighted-average interest rate of 6.9%. Ninety-one percent of the its outstanding debt is unsecured.
As of Nov. 1, Pebblebrook had approximately $175 million in cash, cash equivalents and restricted cash. It also has $636.3 million of undrawn availability on its $650 million senior unsecured revolving credit facility. During the quarter, it repurchased 808,986 common shares at an average price of $12.35 per share.
As of press time, Pebblebrook's stock was trading at $12.95 a share, down 19% year to date. The NYSE Composite was up 18.3% for the same period.