The third quarter brought further normalization to Pebblebrook Hotel Trust, and the industry at large, along with a couple added bumps from severe weather along the coasts.
Speaking during the company's third-quarter 2023 earnings call, Pebblebrook Chairman and CEO Jon Bortz said the U.S. hotel industry saw the demand recovery flatten over the past several months. It was unable to successfully absorb a small amount of supply growth during the quarter, with occupancy declining slightly each month as it did during the second quarter.
While it was surprising the trend didn’t reverse course in the third quarter, it’s likely due to the increase in outbound international travel and cruise ship demand outpacing inbound international travel and business travel to hotels, he said. Both group and transient business demand continue their gradual recovery, but domestic leisure demand declined slightly.
“We believe next year leisure will normalize at higher levels of domestic travel as we lap this revenge travel and international inbound continues its gradual recovery,” he said.
Improving occupancies in urban and top 25 markets, particularly on weekdays, are evidence of the resurgence of business travel in the U.S., Bortz said. The trend is notably strong in luxury and upper-upscale hotels that are predominantly located in major cities.
“We've not seen any evidence of trading down in the industry,” he said, adding that data from CoStar shows demand and performance weakening in the lower end of the chain-scale spectrum.
Pebblebrook is seeing better demand in hotel markets that had been slower to recover, namely Chicago, San Francisco, New York City and Washington, D.C., Bortz said. The markets that had recovered faster, such as Miami, Tampa, Orlando and Atlanta, are now seeing weaker demand growth.
Average daily rate growth moderated during the quarter, he said. So far, rates in October have increased from the lower points in July and August. While Bortz doesn’t expect much change in industry trends for the rest of the year, October performance should get a boost from a favorable calendar in which Jewish holidays fell entirely in September.
“Of course, given the Fed’s efforts to bring down inflation and slow the growth of the economy, we shouldn't be surprised if we see a slowdown or recession sometime in the next 12 months,” he said.
Outlook
Looking to the fourth quarter, Bortz said October started well with healthy business and leisure travel and beneficial holiday calendar. San Diego, San Francisco, Boston and Washington, D.C., have favorable convention calendars during the quarter as well.
Fourth-quarter business on the books shows robust growth in both group and transient business compared to a year ago, he said. There’s a 9.6% increase in room nights on the books with 2.9% higher ADRs, resulting in total revenue on the books growing 12.8%.
Further, group business on the books has increased, with room nights up by 10.3% year over year and ADR up 7.5%, resulting in 18.6% growth for total group revenue, he said. Transient isn’t as strong, but room nights and revenue are up 9.1% with rates flat year over year.
But Bortz said Pebblebrook had a great pace advantage heading into the third quarter, and it experienced the deficit and pickup in bookings made in the quarter for the quarter.
“We feel comfortable in saying that we believe this doesn't represent a slowdown in business activity but in the normalization in booking patterns,” he said. “We believe that more business is being put on the books further out, consistent with more normal pre-pandemic patterns as business and leisure customers have increasingly felt more confident booking further out as their comfort level grows, with pandemic-related concerns increasingly in the rearview mirror.”
In the third quarter, Pebblebrook booked 8.2% less in room revenue than it did a year ago, so its 5.5% revenue advantage turned into a 1% deficit by the end of the quarter, Bortz said. While the company had accounted for the normalization in booking patterns, it did not forecast the impact of the negative weather patterns.
While Pebblebrook executives are encouraged by being almost $14 million ahead in rooms revenue on the books for the fourth quarter, they also expect a significant reduction in the pace advantage over the course of the quarter, he said.
As a result, Pebblebrook’s revenue per available room outlook forecasts 1% to 4% growth compared to last year, which is still favorable compared to third-quarter results, Bortz said. Similar to the rest of the year, the company expects the bulk of the growth will come from increased occupancy. The outlook for total revenue is growth of 1.5% to 4.5%, which is about 50 basis points higher than its outlook for rooms revenue growth.
Portfolio Strategy
Since 2016, Pebblebrook has been pivoting its portfolio mix to be more evenly balanced between business and leisure demand, Bortz said. That resulted in the company selling seven urban properties for gross proceeds of $592 million prior to its acquisition of hotel REIT LaSalle Hotel Properties in 2018. Among other hotels, that deal added six unique resorts to Pebblebrook’s portfolio. Pebblebrook sold five of the seven urban properties from the LaSalle legacy portfolio for total gross proceeds of $821 million.
Since then, Pebblebrook has sold 24 additional urban properties, including the upcoming sale of Hotel Zoe Fisherman’s Wharf in San Francisco, for gross proceeds of more than $1.7 billion. In total, the company has sold 36 urban properties since 2016 for more than $3.1 billion.
Through 2021 and 2022, Pebblebrook acquired five leisure-focused resort properties — as well as two guest houses that were added to the Southernmost Resort in Key West — for a total of $822 million. They have undergone extensive upgrades, repositionings and operator changes they expect will drive significant upside in the future.
Those upgrade projects are on top of substantial investments in its other resorts, including Skamania Lodge, Chaminade Resort & Spa, San Diego Mission Bay Resort, the Marker Key West, Southernmost Resort, L’Auberge Del Mar and LaPlaya Beach Resort & Club, Bortz said. According to the company’s earnings report, Pebblebrook completed $33.1 million of capital investments on its portfolio. The company expects to invest a total of between $145 million and $155 million for the full year.
“We believe all of these resorts due to the investments we've made in upgrading them and remerchandising them will continue to gain market share, thereby enhancing cash flow,” he said.
Pebblebrook went from owning two resorts in 2016 to owning 13 currently, increasing the leisure mix in its portfolio to about 50% leisure and 50% business, Bortz said. As it sells additional urban properties over the next few years, the leisure portion will edge slightly higher.
Even so, many of the company’s urban properties that it has sold or is selling have a strong leisure mix as they are in markets popular with leisure travelers, such as New York City, Seattle and Washington, D.C.
“Moreover, most of the resorts we've been acquiring have very large business group components while their business and corporate transit mix tends to be more limited,” he said. “This helps explain the actual increase in our group mix overall in our portfolio, as this pivot has continued.”
Moving forward, Pebblebrook will continue to take advantage of the public-private arbitrage opportunity that currently exists, he said. It’s selling urban properties in slower-to-recover markets that have lower cash flows and are within its individual property net asset value ranges, then using those proceeds to reduce net debt and repurchase its common and preferred shares at a significant discount to the NAV of the company.
“We've generally sold our lowest-quality properties in the slowest-recovering urban markets, improving the quality and growth prospects of our remaining portfolio,” he said, referring to the 14 properties, including Hotel Zoe, that Pebblebrook has sold since the start of the pandemic.
“We just don’t believe any opportunities in the future will be more attractive or available at a bigger discount than buying our current properties at a 25% to 30% discount to the estimated current gross values and a 50-plus-percent discount to the overall value of the company,” he said.
By the Numbers
Pebblebrook reported a net loss of $56.5 million during the quarter, according to the company’s earnings report. Its same-property hotel earnings before interest, taxes, depreciation and amortization was $114.3 million, with adjusted EBITDAre of $116.1 million.
The company opened its Margaritaville Hotel San Diego Gaslamp Quarter in August after completing a $27 million redevelopment project. It also completed a $140 million, five-year refinancing of its Margaritaville Hollywood Beach resort, setting its new interest rate at 7% for four years.
Pebblebrook continues its work on restoring and fully reopening LaPlaya Beach Resort & Club in Naples, Florida, from damaged caused by Hurricane Ian. Tropical Storm Hilary and Hurricane Idalia negatively affected the REIT’s RevPAR growth by about 90 basis points and same-property hotel EBIDTA by $2.5 million.
By the end of the quarter, Pebblebrook had $829 million in liquidity through $191.6 million in cash, cash equivalents and restricted cash along with $637.4 million of undrawn availability in its senior unsecured revolving credit facility.
It has $2.4 billion of consolidated debt and convertible notes with an effective weighted-average interest rate of 4.4%. It has no meaningful debt maturities until the fourth quarter of 2024.
As of press time, Pebblebrook’s stock was trading at $11.67, down 12.9% year to date. The NYSE Composite Index was down 3.27% for the same period.