Pebblebrook Hotel Trust's executives look ahead to a brighter 2025 as they see a potentially slower 2024 than previously hoped.
During the hotel real estate investment trust's second-quarter earnings call, Pebblebrook Chairman and CEO Jon Bortz said overall hotel industry demand turning positive is encouraging. However, he is concerned about gradually slowing average daily rate growth and a slowing economy.
The Federal Reserve "continues to keep its foot on the brake, and it’s clearly showing up in weakening employment growth, increasing unemployment, slower consumer spending, increasingly restrictive interest rates and a more cost-conscious consumer," he said.
Because of that, Pebblebrook is a little more cautious about revenue per available room growth in the second half of the year, particularly on the rate side. Business travel continues to recover, both for group and transient, and leisure demand remains healthy. While Pebblebrook saw substantial increases across its portfolio, leisure demand across the industry stayed generally flat.
Weekday pricing edged higher at Pebblebrook’s urban portfolio, but weekend pricing at its urban hotels and resorts suffered as they added occupancy at lower rates while the leisure customer has become more price-conscious. Executives expect further year-over-year occupancy growth in the third quarter coupled with continued pressure on average rates.
“As a result of this continuing leakage in ADR — which earlier this year we thought would reverse and turn positive in the second half of the year — we're lowering our RevPAR outlook to 1.25% to 2.25% for the year, with all growth stemming from increased occupancy,” Bortz said.
Despite the adjustment, the REIT still expects healthy growth and total revenues driven by strong out-of-room spend from increased occupancy and the benefits of its significant remerchandising efforts across the redeveloped portfolio.
Bortz’s outlook for 2025, however, is brighter. The combination of positive demand trends and a refreshed portfolio should provide a boost to performance next year coupled with a favorable economic environment and little new supply growth for many years in its urban and resort markets.
“We're very optimistic that a soft landing engineered by the Fed, if successful, will lead to a very positive year for our industry and our company next year,” he said. “It certainly feels like we're on the brink of commencing a very positive up-cycle for our industry and for Pebblebrook.”
Projecting Performance
Looking to the third quarter, Pebblebrook projects RevPAR growth in the range of 1.25% to 3.25%, driven entirely by occupancy growth, Bortz said. The company is forecasting total revenues to grow by 1.7% to 3.8% while total expenses will increase by 3.9% to 4.9%.
Pebblebrook expects its urban properties will lead RevPAR growth next quarter, though San Francisco will be a drag due to a challenging convention calendar compared to last year, he said. Los Angeles is recovering from last year’s Hollywood strikes slower than anticipated. Its hotels in San Diego, Boston and Washington, D.C., should lead urban market performance, with strong growth expected in Chicago due to a robust convention calendar for the quarter as well as the Democratic National Convention in August.
Pebblebrook’s resorts should see flat to modest growth in the quarter, Bortz said. Its recently redeveloped properties, including Margaritaville San Diego Gaslamp Quarter, Hilton San Diego Gaslamp Quarter, Estancia La Jolla Hotel and Spa, Jekyll Island Club Resort, Newport Harbor Island Resort, and Chaminade Resort and Spa should all help drive performance during the quarter.
July is expected to be the weakest month, but August should benefit from an early Labor Day with the holiday weekend starting in August, he said. September likewise will benefit from the early holiday as it will be less disruptive to business travel in the month. The Jewish holidays will fall entirely in October as well.
Total group and transient revenue pace in the third quarter is ahead by 6%, driven by an 8.3% increase in room nights compared to the third quarter of 2023, Bortz said. That is offset somewhat by a 2.1% decline in ADR. Group demand is leading the quarter’s pace advantage with group room nights up by 12.4%, ADR up by 2.8% and group revenue up 15.6% over the same time last year. Transient revenue pace is up by just 1.1% with room nights increasing by 5.9% but ADR lower by 4.6%.
In formulating its third-quarter RevPAR outlook, Pebblebrook expects in the quarter, for the quarter pickup will be lower than last year due to the ongoing normalization of the booking window to pre-pandemic timing.
The pace for 2025 is particularly encouraging, Bortz said. Group room nights are ahead by 4.6% compared to last year, with ADR up 3.5% and group revenue increasing by 8.3% in the first quarter.
“Our recently redeveloped properties should help drive growth in 2025 as they continue to gain market share and ramp up,” he said. “Additionally, our urban markets should also continue to recover, and we expect Portland, San Francisco and Los Angeles — our three underperforming urban markets in 2024 — to provide a positive tailwind in 2025.”
The healthy group pace advantage in 2025 is partly due to favorable convention calendars again next year in most of Pebblebrook's markets. It also has strong in-house group business at many of its larger group properties, such as the Westin Copley Place Boston, Paradise Point Resort & Spa and Margaritaville Hollywood Beach Resort.
By the Numbers
During the quarter, Pebblebrook reported net income of $32.2 million, down from $46.2 million the year before, according to its earnings release. It reported same-property revenue per available room of $234, a 1.7% year-over-year increase. Its same-property room revenues grew by 1.8% to $244 million while same-property total revenues grew by 2.6% to $372.8 million.
Pebblebrook ended the second quarter with $111.2 million in cash, cash equivalents and restricted cash. It also had $636.3 million available in its $650 million senior unsecured revolving credit facility.
The REIT has $2.2 billion of consolidated debt and convertible notes with an estimated effective weighted-average interest rate of 4.4%. Roughly 91% of its outstanding debt is unsecured, and the weighted-average maturity of its debt is about 2.7 years. It has no meaningful debt maturities until the fourth quarter of 2025.
During the quarter, Pebblebrook completed several projects as part of its $520 million strategic reinvestment program. Co-President and Chief Financial Officer Raymond Martz said the company has finished its $50 million transformation of Newport Harbor Island Resort into a premier luxury destination, and Estancia La Jolla Hotel & Spa completed its $26 million, multi-phase redevelopment in April. Skamania Lodge finished its $20 million first-phase redevelopment that introduced two cabins, a three-bedroom villa and five glamping units.
“We are excited to have a completely refreshed and redeveloped portfolio moving forward,” he said. “We expect these properties to gain market share and drive cash and cash returns over the coming years.”
Pebblebrook will convert its Le Méridien Delfina Santa Monica to the Hyatt Centric Delfina Santa Monica starting in mid-September, Martz said. The property will go through a $16 million refresh with some costs offset by key money from Hyatt Hotels Corp. The hotel’s refresh will start in the fourth quarter, and the project is expected to be complete in the second quarter of 2025. Highgate will continue to manage the hotel.
“We don't anticipate any notable disruptions in the flag change or renovation,” he said.