Pebblebrook Hotel Trust’s urban properties led its portfolio during the third quarter thanks to stronger-than-expected business transient and group demand.
During the hotel real estate investment trust’s third-quarter earnings call, company executives spoke about how the recovery of business demand and the steadiness of leisure travel led to solid performance and appears to be trending upward into the coming months.
The strong recovery in urban markets with transient, group and citywide demand improved alongside leisure travelers returning to the cities, Pebblebrook Chairman, President and CEO Jon Bortz said. Urban hotel revenue per available room was down 10.1% compared to the third quarter of 2019, an improvement over the 17.7% shortfall in the second quarter.
“Every one of our urban markets except Miami achieved better RevPAR performance in the third quarter compared to 2019 versus the second quarter compared to 2019,” he said.
The improving business travel trends in the third quarter are continuing as corporate group bookings, leads and site visits remain healthy, Bortz said. At most properties, they’re exceeding 2019 levels.
“We’re closely monitoring overall business and leisure consumer behavior and have not seen any pullback in demand for future booking pace or room rates other than the normal seasonal slowdown later in the quarter,” he said.
There are strong tailwinds from the recovery of business, leisure and inbound international travel back to more normalized levels consistent with the current levels of gross domestic product, he said.
“We believe these strong counter-cyclical tailwinds, along with already low and falling levels of supply growth, will help blood pressures from the inevitable economic slowdown that the Fed intends to deliver,” he said.
Urban Market Recovery
The U.S. markets that showed the biggest gains over the second quarter were the ones that have been the slowest to recover, namely Chicago, Seattle, Washington, D.C, and San Francisco, Bortz said.
San Francisco in particular was among the most robust recovering markets, he said. Pebblebrook opened its 1 Hotel San Francisco in June following its $28 million renovation and rebranding from the Hotel Vitale. The hotel is ranked fourth in San Francisco on TripAdvisor and has been averaging rates ranging from $480 to $580 on a monthly basis.
“This property represents our values and our focus and a commitment to sustainability, repurposing and reuse, and it appeals to a large base of customers with similar values,” he said.
Bookings improved after Labor Day as business travelers returned to the road, said Raymond Martz, executive vice president and chief financial officer. Leisure travel also remained robust, combining to allow strong rate premiums over 2019. The company sees encouraging trends across its portfolio that have continued into October.
“We have not seen any signs of a slowdown in travel demand,” he said, adding that the company is closely watching for any signs, keeping an eye on booking cancellations, activity levels and corporate travel policies.
Same-property RevPAR exceeded third-quarter 2019 levels by 1.3%, the first quarter since the pandemic started that the company has surpassed 2019 comparable results, Martz said. In July and September, same-property RevPAR total revenue and hotel earnings before interest, taxes, depreciation and amortization exceeded the comparable months in 2019 as July benefited from solid leisure demand while September brought in business demand.
Average daily rate was 20% above the third quarter of 2019, led by the REIT’s resorts, which were up 57% compared to 2019, he said. Urban hotels’ ADR was up 8.3%. Each segment saw ADR increase compared to the second quarter of this year as well.
Non-room revenue per occupied room grew by 23.3% compared to 2019 while total RevPAR increased by 21%, continuing trends seen earlier in the year, he said.
“These revenue increases demonstrate our sustainability to take room and non-room price increases across the portfolio and our customers' willingness to accept them, thereby helping to offset operating costs increases,” he said.
Occupancy at urban hotels reached 73.3%, beating resort occupancy, 69.3%, for the first time since the start of the pandemic, Martz said. Each segment still has room for further recovery, with urban hotels at 83% recovered to 2019 levels and resorts at 88%.
Third-quarter total revenue exceeded Pebblebrook’s outlook despite the loss of revenue caused by Hurricane Ian at the end of September, Martz said. It reduced hotel revenue by approximately $2 million in September. The hurricane affected its LaPlaya Beach Resort & Club in Naples, Florida, the most out of its portfolio, and the property is still closed. Even with the hurricane’s effect, adjusted EBITDA was above the top end of its third-quarter outlook by $1.5 million.
Capital Improvements
Pebblebrook remains on track to invest $100 million to $120 million into its portfolio this year, Martz said. More than $80 million has been targeted for several return-on-investment redevelopment projects that are expected to generate cash-on-cash returns of 10% or more once the hotels stabilize over the next two to three years.
As for hotel restorations, the LaPlaya property was hit by the 8- to 9-foot-tall storm surge caused by Hurricane Ian, causing the greatest amount of damage to the property, he said. The worst of the damage was in the property’s beach house and its rooms and building equipment. The resort’s buildings suffered some water infiltration from the wind and rain, but that was relatively minor compared to the ground-floor impact of the storm surge, he said.
“Fortunately, we were well prepared and had a large, third-party remediation crew positioned nearby who arrived with remediation equipment and a crew of 200 to start the inspections, clean up, remediation and repairs the day after the hurricane hit,” he said.
LaPlaya remained closed during repair and remediation work, but crews have made significant progress in the process, he said. The goal is to reopen parts of the resort by late November with further opening later in the fourth quarter. The best estimate for reopening the beach house is during the second half of next year.
The current estimate for the remediation, repair and clean up of LaPlaya ranges between $15 million and $25 million, but that amount could increase over time, he said. Business interruption insurance will cover all the losses after the estimated $1.7 million deductible.
Pebblebrook’s Southernmost Beach Resort in Key West remained open through the hurricane, Martz said. The damage-related costs range from $7 million to $9 million. The Inn on Fifth in downtown Naples will need about $1.5 million to $2 million in remediation and repair work.
By the Numbers
For the third quarter, Pebblebrook reported a net income of $26.3 million compared to a loss of $23.5 million in the third quarter of 2019, according to its earnings release. Its total hotel revenue was $403.9 million, an increase from $280.1 million the year before.
Adjusted EBITDA for real estate was $124.1 million, a 112.5% increase from 2021 and 89.5% recovered from 2019.
During the quarter, Pebblebrook sold three hotels, the Sofitel Philadelphia at Rittenhouse Square, the Hotel Spero in San Francisco and the Hotel Vintage Portland, generating $183.9 million in sales proceeds. For the year, the REIT has sold four hotels for $260.9 million.
The company refinanced $2 billion in all of its credit facilities and term loans in October, resulting in a $650 million in senior unsecured revolving credit facility and three term loans totaling $1.4 billion. The $650 million credit facility’s maturity was extended to October 2027 with two optional six-month extensions. The three $460 million term loans will mature in October 2024, 2025 and 2027.
Following its refinancing, the company has $2.4 billion in consolidated debt and convertible notes at an effective weighted-average interest rate of 3.2%.