Pebblebrook Hotel Trust Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 28, 2023

There are 13 speakers on the call.

Operator

Greetings, and welcome to the Pebblebrook Hotel Trust Second Quarter Earnings Conference Call. At this time, all participants are on a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Raymond Martz, Co President and Chief Financial Officer, thank you.

Operator

You may begin.

Speaker 1

Thanks, Donna, and good morning, everyone. Welcome to our Q2 2023 earnings call and webcast. Joining me today is John Bortz, our Chairman and Chief Executive Officer And Tom Fisher, our Co President and Chief Investment Officer. And for those of you who track these sort of things, this is John's 1 100th earnings call. So congrats, John.

Speaker 2

That's right.

Speaker 1

Wow. So before we start, remind you that comments today are effective for only today, July 28, 2023, our comments may include forward looking statements under federal securities laws. Actual results could differ materially from our comments. Please refer to our latest SEC filings for a detailed discussion of potential risk factors and our website for reconciliations The non GAAP financial managers refer to during our call. We are pleased to report that our adjusted EBITDA and adjusted FFO both exceeded the top end of our Operating expense reductions helped to offset lower than expected RevPAR growth, while greater than expected business interruption proceeds and interest and tax savings provided a further boost to our bottom line financial results.

Speaker 1

We continue to see a gradual recovery in business travel as both improving group and transit demand benefited our urban properties. The recovery in San Francisco led the way with occupancy climbing by over 13 points Followed by Washington D. C. Up 11 points, Los Angeles increasing over 9 points, Chicago up 6 points And Portland increasing almost 3 points. Our urban properties also benefited from recovering leisure travel to the cities with concerts, Sporting events and festivals generating demand loss during the pandemic.

Speaker 1

A big thank you to Taylor Swift, and we love her, Deb and Company and Morgan Whelan, and please keep scheduling those FIG concerts. Recovering Business and Leisure Travel combined with Drove our same property urban and RevPAR growth ahead by 5% over last year's Q2. This helped to offset the moderating room rates and normalizing demand Suite and premium room upgrades we're experiencing from the leisure segment, particularly at our resorts. Same property total RevPAR During the quarter, we experienced some unexpected challenges such as unseasonably cold and wet weather on the West Coast, notably in South California and the Pacific Northwest, which negatively impacted leisure demand, as well as slightly more significant than anticipated disruption

Speaker 3

from

Speaker 1

our redevelopments And the negative impact to our West Los Angeles properties due to the rider strike that significantly reduced demand that emanates from the TV and film industries. Nevertheless, occupancy in our portfolio continued to recover as we regained over 300 basis points or a 4.6% improvement in occupancy. And despite the industry wide softening in leisure demand, we also generated a promising rise in our Q2 weekend occupancy to 79%, a marked improvement from the 75.7% from the prior year. This encouraging trend of improving weekend demand was evident throughout our portfolio, including our resort and urban locations. Our hotels gained market share during the quarter and our TripAdvisor customer rankings are at the highest ever across our portfolio, indicating the desirable nature of our properties and the quality of the service provided by our various operators.

Speaker 1

These achievements are a testament to the success of our recent property redevelopments, which have made our hotels more attractive to both the leisure and business travelers. Disruptions from the 5 significant active redevelopment projects during the quarter decreased RevPAR by approximately 180 basis points, about 30 basis points more than we originally anticipated. Various issues, including delays in receiving and installing FF and E, caused these disruptions I primarily impacted Hilton San Diego GasLink Quarter and Hotel Solimar. All the projects except for Hotel Solimar's conversion to Margaritaville Hotel San Diego Gas and Quarter have been successfully completed. We anticipate Solimar's transformation to be substantially complete by the middle of August, a slight delay from our original targets.

Speaker 1

Despite these challenges, our same property EBITDA of $110,700,000 was in line with our Q2 outlook range. This was achieved through focused efforts to moderate operating expense increases and some continuing success in reducing property taxes. Furthermore, our energy cost increases were more moderate than in previous quarters, registering an 8.8% increase in Q2 versus the prior year and a decline from the 18.3% increase experienced in Q1. This reflects significant investments and efforts to reduce energy and water usage throughout our portfolio. On the property insurance side, we completed our annual renewal in June.

Speaker 1

Despite the very difficult market conditions, we are able to limit our property and casualty premium increase to 59%. We view this as a positive outcome given the current challenging nature of the property insurance markets, the fact that we largely maintained our prior coverage levels and terms And the fact that there are many others out there who have experienced 100% increases or more. Turning to monthly RevPAR growth, April was flat, Mia rose by 1% and June ended down 1% compared to the same months in 2022. Our adjusted EBITDA and FFO benefited from business interruption proceeds of $14,000,000 for LaPlaya, exceeding our forecast of 10,000,000 Lower than expected G and A and interest expenses also contributed to our positive variances to our outlook. During Q2, we completed $52,500,000 in capital reinvestments across the portfolio, mainly concentrated at our five Major property redevelopments.

Speaker 1

And to date, we've invested over $75,000,000 into the portfolio. The major disruptions from these redevelopments are largely behind us as we enter the second half of twenty twenty three. We are confident our repositioned properties will significantly increase our market share and cash flow in the upcoming months years. The detailed operating performance impacts from our 5 major redevelopments to better isolate the performance of the non impacted properties, If we look at the portfolio numbers excluding these five properties, which is Estancia La Jolla, Solimar, Hilton Gaslamp, Vice versa Santa Monica and Jekyll Island. RevPAR growth for Q2 would have shown an increase of 1.8% versus the flat RevPAR we reported.

Speaker 1

Total revenue would have shown an increase of 2.8% versus the 0.7% we reported and hotel EBITDA would have been down by 8.7% from last year's versus 12.9 percent of reported or over $6,500,000 of impact to EBITDA in the 2nd quarter and over $11,000,000 year to date. We also made substantial progress in the ongoing repair, restoration and reopening of LaPlaya Beach Resort and Club in Naples. The 40 room Bay Tower and 70 room Gulf Tower, which houses the resort's lobby, restaurant and club are now largely operational with additional resort amenities being added each month. The 79 Room Beach House is also progressing and we expect the restoration of this building to be substantially complete and reopened by the end of the year. During Q2, despite not offering complete resort experience, plus the noise and disruption Of ongoing construction, the 110 guest rooms available for sale at the 2 operational towers managed to sustain a 46% occupancy With a $4.52 average daily rate and encouraging 19% increase of the average rate over 2019.

Speaker 1

It's worth mentioning before the devastation caused by Hurricane Ian, we project it will apply to generate more than $10,000,000 of EBITDA for Q2 versus the $1,900,000 loss that incurred. Our Q3 outlook factors in an additional $10,500,000 of BI insurance proceeds Related to a portion of Q2's losses and today we have recorded $22,100,000 of business interruption through this year's Q2. As part of our strategic capital reallocation efforts, we completed $97,000,000 of property sales in the quarter, including Hotel Monaco Seattle and Hotel Vintage Seattle, bringing our total asset sales to $232,300,000 since the start of the year. All the sales have been urban properties as we have sought to better balance the leisure and business demand segments of our portfolio to maximize our risk adjusted returns. During the Q2, we strategically utilized $50,000,000 of the sales proceeds to repurchase our common shares at an average purchase price of $13.97 per share, bringing our common purchases to common share purchases to $91,000,000 since the beginning of the year.

Speaker 1

Adding in our purchases from the Q4 of 2022 when our efforts began, we have purchased $160,500,000 of common shares or 8% of the shares outstanding at the time at a weighted average share price of $14.51 per share. We have purchased $16,000,000 of our preferred equity at a $16 per share amount, a significant 36% discount to its par value of $25 And we estimate that our share repurchases have contributed over $2 per share in additional net asset value. This is based on our updated NAV table, which is available on our website. Turning to our balance sheet and liquidity, we have over $823,000,000 in liquidity, far more than we had before the pandemic. It's comprised of $186,000,000 in cash $637,000,000 available on our credit facility.

Speaker 1

Our weighted average cost of debt stands at 4.3% With 78% at fixed interest rates and 91% of our debt is unsecured. Our growing cash balance, the result of our successful property sales Combined with our existing liquidity will be available if needed to address our upcoming debt maturities over the next 12 to 18 months. And with that update, I'd like to turn the call over to John. John?

Speaker 4

Thanks, Ray. I thought I'd share some color about what we've been seeing in the industry and within our portfolio. In the Q2, total industry demand for hotel rooms clearly flattened out With weekdays as a good indicator of business travel's recovery continuing to improve, albeit at a more gradual pace, While the industry's weekend demand for rooms was down year over year in every month in the quarter, continuing a trend that began in March. We believe these slowing demand trends do not indicate an impact from macroeconomic issues or concerns, but rather Primarily reflect 2 major factors. First, we believe leisure travelers are now much more comfortable than last year with traveling abroad, especially to Europe, as well as cruising again with cruise ships reportedly sailing at full capacity.

Speaker 4

We believe this represents the same sort of revenge travel that benefited the domestic hotel business last year. 2nd, we believe that the comparisons to last year's Q2 were more difficult because we're comparing to numbers That significantly benefited from Omicron related re bookings from the Q1, thereby somewhat over stating the true underlying demand recovery in the Q2 of last year. While the revenge travel factor For outbound international travel and cruising will likely continue to impact this year's demand levels. We believe it's more likely to normalize late this year and next year. As it relates to the difficult comparison to last year's omicron induced additional demand, we believe we're now mostly past that impact.

Speaker 4

We believe an easier comparison may already be beginning to show up in July with the most recent numbers STR reported Showing occupancy for the industry ahead of last July month to date. If that trend holds for the entire month, It would be improved from last quarter when occupancy was down year over year in every month. Fortunately, supply is expected to continue to be benign, creating a strong positive tailwind for the industry for the rest of this year and for many years to come. In the Q2, industry supply growth was just 0.3% and we don't expect it to materially increase for quite some time. In fact, we don't see industry supply growth returning to even the 1% level until 2027 or later given the challenges with the cost and availability of construction financing And the high cost of construction, particularly as compared to potential development yields and hotel values for existing properties.

Speaker 4

For Pebblebrook, business group continued to recover in the 2nd quarter with group room nights up 2.7%, ADR ahead by 4.7 percent and total group revenue up 7.5%, so well ahead of last year's Q2. Transient revenue year over year was down 2.3%, while room nights still increased substantially With a lower average rate causing the decline in transient revenue. The ADR decline in transient rates occurred primarily at our resorts And was generally due to what we have called less splurge, which means fewer premium rooms such as suites and view rooms being sold And those rooms that are sold achieved lower rates overall compared to last year's prices, which benefited from very strong domestic demand and a relatively price insensitive consumer. The decline in ADR at our resorts was also caused by group weekday occupancy gains At lower rates than transient, which is typical to our resorts and some occupancy gains made through lower rated channels such as wholesale or international. Year to date, our resort rates have declined by 10.4% For $45.30 yet they remain at a very robust 40.4 percent premium To the first half of twenty nineteen, we're a premium of $111.89 So doing the math, our resort ADR premium has regressed about 29% or so, but it's still slightly better than the 1 third regression from peak rates we were expecting as demand normalized.

Speaker 4

We remain encouraged that our resort rates will ultimately grow from these much higher rates we've achieved in our resort portfolio since 2019. And some of this ADR and RevPAR gain is a direct result of competitive share gains Due to the very significant strategic capital investments we've made over the last several years to reposition our resorts higher in their respective markets with more share gains to come. In fact, our total portfolio managed to gain RevPAR share in Q2, In this case, 66 basis points, even with the approximate 180 basis point negative impact on our portfolio's RevPAR performance due to the 5 redevelopments in the quarter.

Speaker 1

As we look

Speaker 4

at the Q3, we've not yet observed any meaningful increase in cancellations or attrition. This would be one of the first indicators of a slowdown in demand as a result of broader macroeconomic issues or concerns And so far, so good. We're currently forecasting that occupancy for our portfolio in the 3rd quarter We'll continue to increase over last year by as much as 2 to 3 occupancy points, but it's likely to do so at a similar decline in Average rate as occurred in Q2 for all the reasons previously discussed. Total revenue pace for the 3rd quarter Is ahead of same time last year by 5.9 percent with combined group and transient ruminides ahead by 7.9% And ADR off by 1.9%. We believe this revenue pace advantage is likely to shrink Over the course of the quarter, as some transient and group have likely booked further out, potentially having less to book on a shorter term basis.

Speaker 4

Our bookings in the quarter for the quarter in the second quarter were less than the prior year, Though we're hoping some of this was due to the strong bookings out of Q1 into Q2 that took place last year as Omicron wound down In last year's first half, 4th quarter pace on the books has been and continues to exhibit the strongest quarterly year over year growth. And should the economy continue to hold up, Q4 should be our strongest growth quarter of the year compared to last year outside of the Q1 with the easy Omicron comps last year. Currently for the Q4, Our total revenue pace is ahead of same time last year by 35% with room nights ahead by over 25% And ADR up by almost 8%. Bolstering our optimism for the Q4, our very strong year over year convention calendars Across a number of our cities with standout pace growth in San Francisco, San Diego, Boston and Washington DC. Our group revenue pace for Q4 is ahead of same time last year by over 42%.

Speaker 4

It's critical to remember, however, that these positive pace figures are indicators. They're not guarantees of realized business. Of course, it's better when they're up and up by a lot is better than up by a little. In terms of July same property RevPAR, we anticipate a slight dip of about 1% to 2% compared to the prior year With all of it due to rate, as occupancy in July is on pace to be up by around 4 points versus last year. Recent booking activity in July, the peak summer travel month, has been encouraging, particularly for short term leisure.

Speaker 4

Our Q3 outlook projects same property RevPAR compared with the prior year quarter to be in the range of minus 2% To up 1%, but it's still likely to be ahead of 2019. We expect gains in occupancy versus last year, slightly offset by declines in ADR. Our forecast incorporates the last of the disruption From the redevelopment of Solimar being converted into Margaritaville Hotel Gaslamp Quarter San Diego, which is slated for substantial completion and re flagging in mid August. Additionally, We factored in our best estimates concerning the potential negative impact of the ongoing writers and actors strikes in Los Angeles, which we estimate to be as much as $1,000,000 in revenues $500,000 in EBITDA. Of course, we have no special insight into when these strikes might be resolved.

Speaker 4

Currently, we understand the two sides are not meeting. On the expense side, growth over last year should continue to come down in the second half, including in the 3rd quarter, But the biggest year over year growth rate decline in expenses should come in the Q4 as a lot of positions at our hotels were filled from September through year end, Getting to more normalized levels that would be able to service the higher occupancies being achieved this year. As Ray indicated, we've made progress in our energy costs and we continue to successfully reduce property tax assessments And property taxes. The challenge as it relates to property taxes is that the process for achieving reductions Involves local and state governments. It could be a very long process and sometimes litigation is required to achieve a fair assessment.

Speaker 4

As a result, the timing for settlements or results from litigation are unknown and very difficult to forecast. However, we believe that we'll continue to have further success over time in a number of our markets, particularly in our cities. This will reduce our real estate tax obligations and lower our costs in the future, including true ups for prior years accrued and paid based on inflated values. The biggest headwind today in costs is coming as a result of increased premiums for our property and casualty insurance With our new policy beginning June 1 this year and running through the end of May next year, the 59% increase in our premium That Ray mentioned represents a $9,300,000 annual increase in our cost. Moving to our redevelopments, disruption for this year is mostly behind us.

Speaker 4

We expect about $1,000,000 of EBITDA impact in Q3 With the majority coming from completing the conversion of Solimar to Margaritaville in Downtown San Diego. We just toured the property last week and it's looking fantastic. And we're very excited about a cutover To the Margaritaville brand that is currently slated for August 15. We also toured Hilton Gas Lamp, Which we visited at the beginning of Comic Con and the property was sold out, jammed with customer event activations and have well paying advertising wraps covering the exterior walls. The hotel now looks like a brand new High end lifestyle focused Hilton.

Speaker 4

We should be able to gain significant share at both of these superbly located properties fairly quickly given the overall strength of the Downtown San Diego market. We also toured the Estancia La Jolla Resort And in fact, had our Board meeting there last week, and it too has all new rooms and event lawns and is already having quick success recovering From its renovation and repositioning. The property team was proud to report that occupancy is on track to hit the upper 80s this month And the resort should also achieve an all time record in ADR and total revenues for July. Hats off to the Estancia team for doing such a great job ramping back up so quickly. Viceroy Santa Monica's $19,500,000 2 phase redevelopment and Jekyll's approximate $21,000,000 redevelopment We're also substantially completed in the Q2 and we're also very encouraged by the very positive customer reaction to both of these repositionings.

Speaker 4

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 and the several opportunistic resort acquisitions we've made in the last 2 years. We just have the redevelopment and repositioning of Newport Harbor Island Resort and the second and last phase of the Estancia La Jolla Both are expected to commence midway through this year's Q4 and be complete in the first half of the second quarter of next year. The impact from these projects on operating performance should be small, with Estancia expected to have some minor impact due to the redevelopment of the lobby, coffee shop pool and main ballroom, and we expect no material impact from Newport Harbor, Given the property typically has negative EBITDA every month from November through March, and we're likely to close the property during the redevelopment due to the scale and comprehensive nature of the project and the low demand levels during the redevelopment period. As a result, we'd expect our financial results to be clean of any material redevelopment disruption over the next couple of years, while at the same time we'd expect to be gaining share in our markets given the recent repositioning of so many of our properties and the very strong overall physical condition of our portfolio.

Speaker 4

We'll have the added benefit of customers comparing our high quality properties, which are in excellent condition with others in our markets that continue to be starved of capital due to years of a challenging operating environment And today's very difficult debt capital markets. While we currently operate in a fairly uncertain economic environment, Particularly in the near future, our fundamentals are very strong. We effectively Have a newly redeveloped, repositioned and remerchandised portfolio that should outperform its competition. We're in markets that still have significant upside recovering from the negative impact from the pandemic and we'll be in a highly supply constrained environment for years to come. And we have a management team with tons of experience that is laser focused on creating value for our shareholders through reallocating capital to the most attractive opportunities.

Speaker 4

Currently, creating shareholder value Involve selling properties at today's market prices and using a significant portion of those proceeds to repurchase our common And preferred shares at very significant discounts to their current or par values and then using the remaining portion to reduce our debt on a leverage neutral or better basis. With that, I'd now like to turn the call back to our operator, So we can proceed with the question and answer portion of our call. Donna, you may proceed with the Q and A.

Operator

Thank you. The floor is now open for questions. Confirmation tone will indicate your line is in the question Today's first question is coming from Dori Kestin of Wells Fargo. Please go ahead.

Speaker 5

Thanks. Can you give us a sense of to what extent strong convention calendars for you have Translated into outsized rate growth, over time, just to give us, I don't know, some guide on how we should be thinking of Q4's potential?

Speaker 4

Yes. I mean, I don't know. I don't have any math for you at this point, but the two things I'd note is Our convention rates in general tend to run higher than our average rates. And then when there's compression in the market, If it's a medium to large size convention depending on the market, we tend to be able to drive Significant additional premiums on our transient side as well over that period of time. The numbers can run at least for those days often can run, I'd say 30% to 50% higher Then a more typical day and certainly a big convention depending upon how much of the group lock we've taken versus Filling with business outside of the group lock, it could be as much as 50% to 100% premium on those days.

Speaker 4

So it should be a big factor. It should be a much better factor in Q4. And to the point of your question, I do think There'll be less pressure on average in the portfolio in the 4th quarter on rate, because of the better convention calendar in the quarter.

Speaker 5

Okay. What's a good run rate for a fully renovated portfolio?

Speaker 4

Run rate in terms of

Speaker 5

Yes, CapEx then.

Speaker 4

In terms of CapEx, Probably looking at something more like $50,000,000 to $60,000,000

Speaker 1

And Dory, Our CapEx over the next couple of years should be a little bit lower than the typical run rate because as John indicated and we detailed in the press release, the amount of capital we've invested in the portfolio They're pretty significant. So the normal maintenance CapEx will be lower, at least over the near term.

Speaker 5

Okay. And then just on the recent renovations, how should we think of the ramp up over the next few years from maybe an EBITDA yield perspective?

Speaker 4

Yes. I mean, it really depends on the market and how quickly we can adjust pricing. So It usually takes on average of about 3 years, maybe 4, if markets are slower To go from pre renovation numbers to numbers that we are shooting to average about a 10% Cash yield on the renovation dollars, the redevelopment dollars in particular. So The pace varies by market. Some markets we can do it quicker because we're not held back By group rates that are on the books for future years.

Speaker 4

So a good example would be Estancia, where we don't do Convention related business and most of our group books within 12 months of arrival. So we can increase rates more quickly in a market like in a property like that Then we can say in Downtown San Diego where we've locked in convention rates in many cases for 2 or 3 years. Now some of those markets will be able to get adjustments by going back to the Convention authority and the client, to get increases because of the investments made in the properties, but that isn't always the case. So It's generally 3 to 4 years. And I mean, frankly, the easiest way to think about it is pretty much evenly over that period of time.

Speaker 5

Okay. Thanks, John.

Speaker 4

Thanks, Dory.

Operator

Thank you. The next question is coming from Smedes Rose of Citi. Please go ahead.

Speaker 2

Hi, thanks. I just wanted to ask you a little bit more on sort of how you're thinking about margins going forward. It sounds like The pace of cost increases is maybe easing, but concurrently, it seems like RevPAR is sort of flattish, But you're shifting with higher occupancy and lower rate. That seems like that was kind of way on margin a little bit as well. I'm just wondering if you could maybe If there's any sort of back of the envelope thoughts on that kind of shift if occupancy goes up and rate goes down, what does that do to margin?

Speaker 4

Well, I think we've seen what that does on margins as we brought our staffing Levels up to full staffing towards the end of last year and you've seen what that's done to margins Over the first couple of quarters here and we'll see more margin degradation on a year over year basis. In Q3, although it ought to be lower than the impact in Q2 because we started Restaffing in really September of last year is when we started to have a lot of success at our properties Filling those open positions. So I think over time, it's obviously that would be a terrible Long term trend if that were to occur, we don't think that's necessarily the case. We think the resorts are really moving back to a more normalized level. And the good news is, as Indicated by my numbers that I provided, I think we're stabilizing.

Speaker 4

We're likely to stabilize here at a Far higher level, maybe 60% to 70% higher than where we were in 2019 with rates. And The second thing we need to come back, which will help is volume. Partly why the occupancy flows better, It doesn't flow as well as rate, but it's going to flow well here as we're fully staffed outside of the marginal costs of adding Temporary folks for banquets and catering. So I do think as we get towards the Q4, You'll see margin degradation shrink significantly. And as we move into next year, I think Our cost basis will more normalize on a year over year basis.

Speaker 4

And We'll see what happens with rates next year. That will depend on the macro environment. And of course, that will depend upon What's going on from an overall demand perspective, but I think we feel good about demand continuing to recover next year, Particularly in the urban markets, we think the outbound international Demand that's on a sort of revenge travel basis, as well as some cruising, we think that reverts back to being Some of that being domestic and that should help next year from a demand perspective. And then we have a lot of international inbound That's not yet fully recovered and we think that'll continue to recover next year. So all of that should allow us to grow Occupancies next year and volume, with group coming back more right now, our pace for 2024 Is in good shape.

Speaker 4

We're up over 11%, almost 12% in group room nights For next year. And it's that volume that we need, that will flow well, to the bottom line. So Because we're not at a normalized pace, we really need that volume to come back to get to the higher levels, to support the sort of level of fixed Staff that we have at our properties.

Speaker 1

And to me, to add to that, I think there's a tendency to Look at the current quarter's margins and assume that's a new run rate. And I think we have to really carve out is because of all the renovations we had in the quarter That created a lot of disruption, not just on RevPAR, but also in food and beverage. You look at Solimar, Estancia and Hilton Gas Lamp, During the renovations this quarter, you really can't have group meetings when you have the hotel under construction. It's very difficult. So that also causes impacts.

Speaker 1

I wouldn't draw conclusions about, For example, food and beverage margins in Q2 and is that a new run rate? There is a lot of noise in there, as John indicated, as we stabilize and have a normal mix and we're still about 13 Percent down occupancy points down to 19 as we gain those demand segments that will also help margins, given the fixed cost nature of a lot of our properties.

Speaker 2

Thanks. And John, can I just ask you, just you mentioned that weekday business urban continues to pick up, I Driven by business transient, but you did note that it was at a more gradual rate, which is something that we also see kind of in the numbers looking across second quarter sort of nationwide and it's something we hear from other companies? And I'm just wondering, is there anything in particular that you would attribute a slightly slower recovery in business transient relative Initial expectations or do you think it's just going to take longer or do you think some of that's gone away or maybe just your thoughts there?

Speaker 4

I think it's probably all of the above. And by the way, my comment about the slowdown in the rate of business Recovery related to the industry more so than us. I mean, if our urban market Weekday occupancy was up 5.2% over last year. So we continue to see we picked up Over 5 points of occupancy, it's really a 7.6% growth on a percentage basis. So we Obviously, the cities and particularly some of the cities we're in have been slower to recover that business travel.

Speaker 4

It is coming back. I don't think we know where it's going to end up yet, with all the different factors. Businesses are still, changing their in office Requirements we've seen, no requirement to be in the office to go to 3 days, to go to 4 days, Some have gone to 5 days. We've seen announcements of companies, particularly on the West Coast that went to none and are now Leasing office space and bringing people back at least 3 days a week. So I think it's a little early to figure out where we end up.

Speaker 4

We're just really past the point where I think people feel normal again in traveling. I mean, you still see masks here and there, but I think in general, people Are forgetting, the pandemic and that leads back to normal travel. So, I think perhaps we've lost some of it permanently, perhaps it gets replaced by what we call hybrid travel, others have called leisure. We definitely continue to see that. We one of the trends we've seen is there's Business is a little slower to book business around holidays as people are probably taking longer holidays and Have more flexibility because they're not back at the office yet.

Speaker 4

So I don't know how it's all going to end up. But If you look over the last 100 years, business travel generally follows GDP and we think that connection We'll recover back to that connection again.

Speaker 2

Great. Thank you. Appreciate it.

Operator

Thank you. The next question is coming from Bill Crow of Raymond James. Please go ahead.

Speaker 3

Hey, good morning. John, one for you and then I'll Turn to rate for a second, but on the cap rates that you used in your NAV calculation, I was intrigued by The cap rates in the 2s, I think, in San Francisco and then what I thought were low cap rates in Portland and Washington, D. C. And I get it. There's not much NOI.

Speaker 3

And I also remember some, I'll put it in raised terms, what, 45 or so Conference calls ago when you were buying in San Francisco in the low twos. My question, I guess, is if you didn't have The desire to pay down debt, if you didn't have a desire to buy back stock, would you be buying assets in 2 cap rate in San Francisco?

Speaker 4

So a couple of things. Obviously, the cap rates are a result A much more analytical decision a buyer makes as to why they buy a property and what kind Total returns that they're looking for just like we do, right? We look at 5 year cash flows, we look at 5 year IRRs, We look at price per key. We look at comparison to replacement costs. There are a lot of different things you look at in a market When you're underwriting, so we don't use cap rates to determine decisions in the markets nor do we think buyers Frankly use cap rates.

Speaker 4

They do look at yields overall, and the growth in yields over time and those changes. But unlike maybe some other property types, cap rate is not a methodology for determining value. To your question about so to your question about would we be buying in some of those markets, One of the things I think has become more challenging in the public markets is The public market shareholder has become far more short term oriented than they were when we started Pebblebrook. And so I think they're less willing to look at long term potential Value creation within the asset portfolio than they were 13 years ago when we started the company. And so I think it becomes harder for a public company like us in our space To buy in markets where there's a lack of yield.

Speaker 4

And therefore, I don't know that we would as a company be buying there. I think if I had the opportunity personally, which I unfortunately do not, so just keep that in mind, but if it were me personally With a long term horizon, for my investment returns, I think it's a great time to be buying in these markets. I think they're incredibly cheap. The discounts to replacement cost and which is an indicator of When supply can be economically justified in a market, I think that discount is Much bigger than it was back in 2010 2011 when we started buying. So I think it's a great time if you have the right time horizon, You can live with expensive debt in the near term with low yields.

Speaker 4

And so personally, I'd be buying or if somebody had a long horizon, I think it's a great time. But I think for us as a public company, it's more challenging.

Speaker 3

Yes. I appreciate that insight, John. Two quickies, I hope. Ray, I'd like to get your thoughts on BI. 3rd quarter was higher than we would have guessed In your guidance, at least, from a seasonal perspective.

Speaker 3

And then so I wonder what the Q4 looks like, if you can give us an idea and then what would be And I've thought to be left over for next year. And then the second quick question hopefully is, you're wrapping up this Massive strategic repositioning program, but you're kind of 7 years almost 7 years into it. I'm wondering if we're going to start to see A new cycle began or do we actually have an extended period of time with no renovation disruptions?

Speaker 1

Sure. Well, first on the BI, that's a result of the progress we make with our insurance carriers. So We submit what we believe the hotel would have done without any sort of a storm and we have to negotiate with our carriers. So That's a result of that. So it's hard to really say the exact number we'll get in future quarters here.

Speaker 1

It's 2nd quarter that we can't

Speaker 4

It also depends upon How much we lost, I mean, we've been losing money at LaPlaya while it's open and we lost more money in the quarter as an example Than we thought, so.

Speaker 1

Yes. So it's a handful of factors that we go through. Now, like ultimately, for For example, in the Q2, we have all to negotiate and agreed to a higher amount of $14,000,000 versus the $10,000,000 we were expecting. It's not to think we're going Do the same in the Q3, but we'll see our progress there. 4th quarter, I would think it would be a lower number because these tend to be a quarter in arrears.

Speaker 1

So what we booked for the Q2 here at $14,000,000 that's a result of the Q1 and so forth. And typically it will play It's seasonally weaker in the Q3 of the summer months. But you know, down in Southern Florida, August, September tend to be pretty hot down there with hurricane risk. So That would be less BI number there. So I wouldn't assume much for the Q4.

Speaker 1

If it is, it's in the single million kind of range ish And then as we think about 2024, that will depend on the ramp up of LaPlaya. As we noted, we think the hotel, the resort will be substantially By the end of this year, there'll be a ramp up component. It doesn't get all the way back to prior levels right when we start in the quarter. So there may be some Trailing BI we'll be able to get as a result of that. So that'll be less than we expected.

Speaker 1

We expected this year LaPlaya to be generating in the Neighborhood of about $35,000,000 of EBITDA and that's the number we're targeting on the BI side, and how it trails off in 2024 depends on the recovery and bounce back of LaPlaya. And then second question on the renovation area for the 7 year cycle or whatever that is. We look at each asset by asset with our asset management team and look at the capital there. Unfortunately, when we look back at the renovations and redevelopments we do, We tend to do a very good job. These are not just cursory sort of refreshes in the guest rooms.

Speaker 1

These are really substantial renovation, Good quality FF and E goods and those items that tend to do last longer, and we're forward thinking design. So, I wouldn't necessarily think that if a property wasn't renovated in 7 years, we have to go through another major redevelopment project here. As John indicated, we do think for the next couple of years here, we're going to have very little, any sort of disruption from any renovation activity. Here and there, we may do a refresh, But not really many redevelopment projects to be worried about as we think about 2024 and beyond.

Speaker 4

And Bill, in that regard, I think Everything we buy for our hotels is custom made. We're not buying from IKEA. We're not buying from the sort of standard low cost manufacturers. And we also don't let our properties sit for 7 years or 10 years or 12 years either. We're always We're constantly refreshing.

Speaker 4

We're recovering sofas. We're replacing them. We're buying new pillows. But these things don't have a material impact. I mean, Even what we're doing, we're doing a meeting space refresh at the W Boston this summer.

Speaker 4

It doesn't really have a whole lot of impact On the performance of the property, and it's primarily a soft goods refresh. So It's not out of service very long. So if you think about our portfolio, it's not We're not doing a renovation when we do these projects. We're almost completely rebuilding it in many cases, At least on the interiors and often doing behind the wall work as well. But all of that regular capital maintenance is an ongoing effort on our part.

Speaker 3

Thanks for the insights. Appreciate it.

Speaker 6

Yes.

Operator

Thank you. The next question is coming from Duane Fenningworth of Evercore ISI, please go ahead.

Speaker 7

Hey, thanks. Just to follow-up on Bill's Question on BI. When you think about kind of Naples and LaPlaya in its entirety and kind of the timing of BI That may fall into 2024 and the recovery of that property, how should we think about growth, EBITDA growth, Inclusive of BI, inclusive of operations, kind of 24 over 23.

Speaker 1

Yes. Well, that's a nice crystal ball. Well, fortunately, we've been through this Before the other properties in the rebuild, we have seen that Naples tends to rebound somewhat quicker than some other markets like, I'd say Key West as an example. So we expect LaPlay to be bouncing out quicker, but there are a lot of factors. I think net net, I think maybe the more conservative Way to think is that the overall EBITDA contributed by LaPlaya inclusive of BI would be less than 24% than it is in 23% because we're getting the Full fledged number and there will be a ramp up area there.

Speaker 1

But as we get forward and we get closer to the completion there And ultimately resolving with our insurance carriers what we're able to negotiate here, we'll be able to provide a better color on that as we start the year. But there certainly won't be a ramp up and there's always unintended consequences. You start up a property, a chiller doesn't work quite well that you thought would. There's a lot of things that will be these tail items that we'll be dealing with, much like we did when we were dealing with Ian, 5 years ago.

Speaker 7

Thanks for those thoughts. And then just a distribution question. Can you talk a little bit about how you build awareness For the upgrades and the renovated hotels, particularly for your independent hotels, How does this education process happen for customers? Any new thoughts on distribution for your operators? Thank you.

Speaker 4

Sure. So, it's a pretty comprehensive typically, we'd sit down our asset managers sit down with our Operating team, their corporate marketing staff as well, put together the playbook for Reintroducing a redeveloped property, sometimes it's renamed, sometimes it's Re flagged or flag removed, sometimes it's the same name, but just an upgraded product. And it's comprehensive. It's marketing, it's PR, it's direct sales effort, it's Using digital media, it's offering promotions upfront to get people to come And do a trial of the new product. We'll be conducting tours.

Speaker 4

We've had Probably hundreds of tours for a group at Margaritaville in Downtown San Diego at this point already. And we'll share renderings, which are photo quality renderings, etcetera. So It's a very comprehensive effort to get the word out. There's usually opening events, though we're not big believers in the big opening Party necessarily versus having 10 events that involve bringing sales people both on the group and The transient side and the corporate side to the property. So it's pretty comprehensive.

Speaker 4

We'll spend Significant dollars, certainly 100 of 1,000 of dollars. And if it's a big property and a big Project, just like in Naples, we'll like we did last time, We'll spend 100 of 1,000 of dollars extra on sales and marketing activities Down at LaPlaya because it's been closed for effectively over a year and we need to get it back in people's minds to come back down again. So, pretty comprehensive plan put together with our operators, that's been successful in the past. Thank

Speaker 3

you. Thanks, Dwayne.

Operator

Thank you. The next question is coming from Floris Van Dykem of Compass Point. Please go ahead.

Speaker 6

Thanks. I have, I guess, 2 questions. If you can touch on the balance sheet a little bit. Ray, you've been you're building up $175,000,000 cash cushion. You talked about some of You don't have any near term maturities, but longer term maturity or your debt is fairly short.

Speaker 6

The Weighted average maturity is, I think, just over 2 years. Do you see a comprehensive refinancing of that? And where would you Maybe talk a little bit about the cost of where you think you would borrow today. Obviously, people investors were a little scared when Blackstone refinanced, put a lot of debt on Hotel Dell, but I had to borrow it 9.5% or somewhere in that neighborhood. And Pete Mond, an office company, I know you're not office, but recently did a 5 year note at 9.25%.

Speaker 6

Maybe you can touch on where you think you would Be able to cap unsecured borrowings at today?

Speaker 1

Sure. Well, a couple of things as we look into our balance sheet. You're right. We have over $180,000,000 of cash on our balance sheet. And unfortunately, we have very minimal maturities this year.

Speaker 1

We have some term loans maturing in 2024. Actually, our weighted average maturity is actually close to 3 years, not 2. And as we think about, you should assume that additional cash that we're building up here, we'll be using to address some of these 24 Maturities as well as having conversations with our bank groups with some of the term loans with paying down some and perhaps maybe extending a portion of that out. So it's a part of the overall plan that we have been thinking about actively and we do it in concert with the how we deploy our capital for stock buybacks and And we'll be hold back for debt. And also know we have ongoing conversations with all of our banks all the time.

Speaker 1

So these are all done in a very Good manner and these relationships we've had for a long time. So, as you expected, we are planning and addressing those actively, as we think about 2024. As it relates to new sort of debt. So first of all, right now, our spreads on our line is about 220. So if We have a completely unused credit facility that we can borrow at $2.20 over, that's relatively low.

Speaker 1

New debt, if we originate a property sort of loan, If that's your question, somewhere it looks like the markets right now are somewhere and so for plus 3.75 450 is probably the range of a lot of debt we're hearing. It obviously depends a lot on the market. If you're in a kind of resort sort of location or asset generating good cash flow, the Spreads might be lower. If you're in an asset that's a little more a market that's more challenged, that spread could be wider. I can't speak to what Blackstone did or didn't, but Something that's $375,000,000 to $425,000,000 to $450,000,000 over is probably like the level for new borrowings.

Speaker 1

So we'll look at that as we address overall our debt maturities and we have a property loan maturing next May at Margaritaville. That asset is highly financeable And we've garnered a lot of interest. So we'll look at our options there, vis a vis, well it's also happening with our balance sheet and our growing cash reserves.

Speaker 6

Thanks. And maybe my follow-up, if you can touch on the San Diego market in particular, You've got a number of renovations that have just finished. You've got, I guess, the Margaritaville is still yet to be completed. But maybe touch on the outlook for that market. And I note that peak EBITDA or for them for those assets was, I believe, 37,000,000 You're on track right now of $29,000,000 Is this a market that can generate $50,000,000 of EBITDA in your view?

Speaker 6

And maybe talk a little bit about The convention calendar going forward as well.

Speaker 4

Sure. So I would say San Diego is at least For the near term, the strongest market we see in our portfolio. And we have All 4 of our downtown properties come August here. We'll have had major redevelopments. The Westin, an $18,000,000 project, the Embassy Suites, a similar number for a smaller property.

Speaker 4

These two projects in the mid-20s, millions, they've all been repositioned higher In the market, the convention calendar and so when you look at Q2 numbers that we report for San Diego, Keep in mind, it involves 2 properties downtown and Estancia that were all dramatically impacted In the quarter, it was actually a good quarter for the non renovated properties. Convention calendar It's very good for the second half of the year. It's very strong in the Q4 and it's We're going to make an all time new record in 2024 based upon what they have on the books. It's Huge actually even compared to this year, which was I think pretty close to the all time record. So And there's no new supply in the marketplace.

Speaker 4

So, and the weather, I guess, continues to be pretty favorable. And When it if it's getting hotter in other places, it only helps drive leisure into that marketplace. So Really, really attractive market, why we've made such a large investment there. And we do think there's an opportunity for dramatic improvement And EBITDA over the next few years.

Speaker 1

Yes. And for us to put that perspective, the convention center side for 2023, The market is projected to generate about 800,000 convention center room nights. In 2024, that increases to 930,000. And even in 2025, it's another strong year at 850,000, which would be one of the best years. These are as good as the previous best years back in 2016.

Speaker 1

So it's only next few years in San Diego look very good and why we're encouraged and why we're glad we invested the capital in those assets in San Diego, Which should benefit from the strength in our market.

Speaker 4

And I think it's the city and the market went through Some challenges when the football team moved up to LA basically, but you look at where they've gone since, They just got awarded an MLS franchise for soccer. The women's soccer team Has broken records compared to other teams around the country in attendance. They're attracting lots of concerts and sporting events Into that market and we all know that the life sciences side of the economic base continues to grow dramatically And San Diego is one of the strongest in that market. In fact, the interesting thing about downtown Is one of the opportunities it has unlike other markets is it's never had much corporate activity other than Some defense contractors and the Navy and potentially Homeland Security being so close to the border, but It has significant amount of construction downtown that's geared to life science and lab space. And If in fact they're successful leasing that, it could have a dramatic impact on the demand levels downtown.

Speaker 4

So Really exciting market and appreciate you asking about it.

Speaker 6

If I can ask or maybe just briefly follow-up, how will your reposition Margaritaville GasLink Cater to some of that convention. Is that a it's not a typical convention hotel. Do you think that's going to benefit from the compression? Or will people actually will you get group into that hotel as well in your view?

Speaker 4

We'll get group into that hotel. We have Great event space that's been dramatically improved, from what it was as the Solimar. And As you know, Margaritaville is a strong attraction for that lifestyle vibe That people love, whether they're convention goers or they're leisure customers. So, we think it'll benefit From both segments, in a material way.

Speaker 6

Thanks. That's it for me.

Operator

Thank you. The next question is coming from Ari Klein of BMO Capital Markets. Please go ahead.

Speaker 8

Thank you and good morning. Maybe just following up on San Francisco market and maybe a little bit less exciting than San Diego. You took your Cap rate assumptions higher in the latest than I NAV, still quite a bit exposed to the market. And one of your peers is largely throwing in the towel there. And it looks like the Calendar next year is more challenged.

Speaker 8

So where do you think the market goes from here? And it seems like you do have long term optimism. What kind of underlines that?

Speaker 4

Yes. I mean, we get into a lengthy discussion about what the underlying demand factors are and the economic factors. I don't want to I mean, you have one of the strongest economic bases in the country in San Francisco in the Bay Area. You have it's one of the largest and strongest life sciences market. It's obviously by far the biggest venture capital market.

Speaker 4

There's more businesses created in San Francisco than pretty much the entire rest of the country. It's the center of AI, which of course has tremendous potential growth That folks are talking about, we've already seen some of that growth as those companies raise capital, they hire people, they need offices. We're also seeing some relocation of businesses from outside of San Francisco into San Francisco To take advantage of low office rates and sublease rates. San Francisco is one of those cities that because of the educational Cluster there, the technology cluster, the culture of it's okay to fail and start over, All of that is such a big factor. And then I would tell you the politics have already had a significant move to the center And a recognition that, we have to address these issues, these basic issues of safety and life sciences.

Speaker 4

And I think The media is about 9 months behind the reality on the ground. I think it's frankly, it's a safer, cleaner place than it was in 2019. And I think that that will continue to improve. So we continue to believe in San Francisco in the long term, But we have reduced our concentration there, which had gotten into the mid-20s, which we thought was too high.

Speaker 8

Thanks. And then maybe just reflecting on the hold music, can you give us some color on what kind of benefit you saw

Speaker 1

Well,

Speaker 4

It's interesting, in Chicago, I think, I mean, you probably saw the media reports, but Chicago had its highest RevPAR day, I think, ever, the weekend that she was there. So And it's not just her, I mean, the dead, we had one of the strongest weekends since pre pandemic In San Francisco, when the dead gave their supposed final concerts ever, The inevitable final tour that is never final. And we look at LA, Taylor Swift has 6 dates in the 1st 10 days of August at SoFi And we've already seen significant pickup as a result of that. And we have all kinds of promotions at our properties Related to Taylor Swift as well. So, it's pretty meaningful in these markets.

Speaker 4

It's a big demand driver. When I remember a few years ago, pre pandemic Garth Brooks did 5 shows in a row in San Diego, sold out Petco 5 nights in a row, And we sold out our hotels 5 nights in a row at premium rates. So it's material When these big name entertainers come into the markets.

Speaker 1

Ari, when you think about Taylor Swift, just envision her, she's a rolling Super Bowl. She goes in and she helps to market across. So that's probably why the Musically was not to her and it's been great. So a big needle mover, very positive this year.

Speaker 2

All right.

Speaker 8

Appreciate all the color. Thank

Operator

you. Thank you. The next question is coming from Michael Bellisario of Baird. Please go ahead.

Speaker 9

Thanks. Good morning, everyone. First question, I want to come back to the margin topic from earlier. To put a big picture high level, is there a sort of a normalized run rate for expenses that you're thinking about or that we should be thinking about, Whether it's for your markets, your portfolio as we look out to 2024 and 2025.

Speaker 4

I wish it was that easy, Mike, but You know that the when we're we're not in a normalized operating environment yet and We're moving closer to it. I think we're at normalized staffing levels, but for marginal staffing related Marginal occupancy recovery that we expect to see here, but I don't think that translates into any kind of stabilized margins at this point. So there's a lot of volume we need back that will flow really well once we get that volume back, whether That's on the room side or it's on the F and B side, particularly from recovery of group. So Unfortunately, we don't have what you're looking for. Therefore, we can't give it to you.

Speaker 1

But Mike, in general though, and we touched on this on our call, we are seeing a more moderating expenses. The wage rates are The growth rates are coming down versus what they were last year. So that should be less of a headwind going forward. And then, other supply costs with food and beverage, those input costs are also moderating versus where they were last year. So those should be improving factors in the margins there.

Speaker 1

Now headwinds that we will have for the next 12 months are property taxes that we talked about. That increase, it's $9,300,000 a year. That's 50 basis points or so in margins. And also that stabilizes at some point in time. And energy has also been somewhat of a headwind that's moderating.

Speaker 1

So there's different inputs. You have to look at labor differently than you have to look at some of these other costs like energy and, prop insurance. And what should be a positive deflationary factor is some of the property tax reductions that we're successful on achieving and hopefully we'll have more to Report on it in the coming quarters.

Speaker 4

Hey, Mike, the thing I would suggest and frankly we've always suggested this, but just as a reminder, We don't forecast margins. Margins are a result of forecasting revenues and expenses. It's a lot easier to say we think expenses are going to be 4% or 5% or 3% growth on a year over year basis, Depending upon volume levels than it is to forecast margins for each category. So Certainly in building your models, we'd suggest you frankly use an expense Escalator and a revenue escalator as opposed to trying to solve start with margins.

Speaker 9

Thanks for that. Figured I'd ask. And then just switching gears quickly just on the transaction front, maybe over the last 90 days, What's changed? And are you seeing any buyer interest get better or worse in any particular markets where you're looking to sell hotels?

Speaker 10

Yes, Mike, I don't think much has changed. I mean, I think you read about it in the press in terms of all property types with transaction volume being down Largely as a result of the availability of the debt or lower proceeds, high cost debt. So I would say that it remains challenging. I would say that certainly the deals that are getting done, it's high cash flowing deals that are either resorts or select service. I would say maybe the one pivot that we're seeing and I think John mentioned it earlier is that in some of these longer to recover markets, People are becoming a little more yield focused and so it's impacting in terms of their potential pricing because their pro form a and their underwriting It's taking that much longer to get to peak, which is obviously impacting pricing.

Speaker 10

But I would say that there still remains a lot of investor interest. I think they're just trying to pick what is their level of conviction to move into a market.

Speaker 9

That's helpful. Thank you.

Operator

Thank you. The next question is coming from Gregory Miller of Truist Securities. Please go ahead.

Speaker 11

Thanks. Good morning. I'd also like to ask about 2024 for Southern Florida. For the upcoming winter 2024 season and perhaps reflecting your commentary on Revenge Leisure Travel normalizing. How are room rates trending next winter in markets like Key West and Hollywood Beach Relative to 1Q 2023, how impactful do you expect your winter 2024 rates

Speaker 4

Thanks. Hey, yes, thanks. Tough question. I don't think we have The Q1 number is handy in terms of what's on the books in the Florida market. There's not first of all, there's not a lot on the books this far out in those markets.

Speaker 4

I think there's an opportunity To normalize and we still have demand to recover, occupancy to recover in those markets, particularly down in Key West, Which had that up and down kind of swing. We're still running lower occupancies. But in the second half of this year, it looks like We're getting a little bit closer to more normalized demand if you trace it back to 2019. So I can't I don't have anything to give you yet. I mean, we can go through the data offline and have a conversation about what those rates look like.

Speaker 4

But I wouldn't read a whole lot into them just yet, given the low amount of business that's on the books.

Speaker 1

Yes. And it also be inaccurate to read too much into if we have a 1,000 more room nights booked this time versus last time last year, It's not as much as what happens really closer because it's we're outside the booking window really.

Speaker 11

Thanks. That's understandable. For my follow-up question, I'll try to ask for some clarity on what's going on in San Francisco on a group side relative to the Thanks figures that you noted in your release and the 2024 numbers you mentioned in response to Smedes' question. How is your San Francisco Group revenue pace looking for 2H23 and for 2024.

Speaker 4

Yes. So it's up significantly for the second half of this year, not surprisingly given the convention calendar There as well as our properties particularly the one which is ramping up in that market and only opened in June of last year Is doing extremely well on group despite the more limited amount of meeting space that we have. I think we're running Around 25 percent group mix at The And of course, we're doing it at high rates. So we're in pretty good shape in the second half. We will see a nice continuing recovery in occupancies In San Francisco in the second half, I think as I said, the second half comparisons to 2022 are much better Then the first half comparisons, yet we still recovered 13 points of occupancy in the first half of the year And that does not include the one because it wasn't open last year.

Speaker 4

As it relates to 2024, The convention calendar is up in the first half, and I don't know the bookings off hand for that market. We can look them up and get back to you, but I presume that our group bookings are going to track the convention calendar ultimately in that market. And Just keep in mind that a lot of our properties may not participate in the conventions because of their small size, But they'll get in conjunction with group. Occasionally, we even sell out properties like Zetta to one group who takes the whole property because of It's size. So we're optimistic about the first half of next year.

Speaker 4

And the good news about San Francisco is, again, I think the quality of life has already gotten better on the ground and we'll continue to. I think the perception will catch up with the reality As we move further away from the negative headlines that we've seen and businesses are coming back And we're seeing more and more positive indicators of demand recovery in that market. So We have a lot of time to help fix the second half. And then right now, 25 is up, I think about 100,000 80,000 to 100,000 rooms compared to 24, and with still time to fill more in that space, so In that year. So, there's a pretty big effort going in on the part of the convention authority and of course Part of all the hotels in the market to get in house group to backfill for convention business that Is down in the second half of next year.

Speaker 11

Thanks. That's all I have. Appreciate it.

Speaker 1

Thanks, Greg.

Operator

Thank you. Our final question today is coming from Anthony Powell of Barclays. Please go ahead.

Speaker 12

Hi, good morning. Just a question on international travel. I think you said that you expect the remainder nature of that to, I guess, we're seeing next year. How do we know that? I mean, we know that airlines are adding more capacity to go international markets.

Speaker 12

International markets are obviously appealing. It's going to be a bit cheaper in terms of just food and beverage and whatnot. So I'm curious what your view of International destination travel versus domestic will be going forward?

Speaker 4

I think it's a lot of anecdotal Evidence and it's also I think if we look at our experience with I'll use This defined term revenge travel again, in other segments for other reasons, I think we see The same thing happened. So, I think when you look at outbound, It's fully recovered and in fact over the historical norm particularly to Europe. And Again, we think that normalizes. There's a lot of people who had trips canceled, Ray is one of them sitting here at the table, but I have a lot of friends and others who have trips canceled because of the pandemic We took them this year. So, and they don't go every year.

Speaker 4

So, I do think on an outbound basis, We'll see that normalized next year. I think it's rational to think that. And I think It's also gotten a lot more expensive to travel abroad. As we know, the international ticket prices are way up from where they were. And on the other side of it, we're starting to see a decline in the domestic ticket prices here in the U.

Speaker 4

S. So Some of that will have an impact. And so I think we feel pretty comfortable that that's likely to happen.

Speaker 1

And Anthony, I'll touch

Operator

on that.

Speaker 4

And by the way, I think capacity growth is important because inbound travel to the U. S. Still has a long way to go to recover. So It's not like global international travel is necessarily going to decline. It's just going to go in different directions.

Speaker 1

And Anthony, actually the other side of your question is, so we have strong outbound U. S. Travel international markets, which we think will more kind of normalize the next year, Less going out. What we haven't really experienced a big benefit here in the U. S.

Speaker 1

Is inbound international. I mean Europe travel is up versus where it was last year, but it's still Well below pre pandemic levels and Asian traveler is very, very weak. That really hasn't largely Come into the U. S. So that should be a tailwind that we should see at some point in time.

Speaker 1

I mean, who knows when China opens up and they start coming back here, but Certainly from what we're hearing about the Japanese and Korean traveler in the Pacific there, we should see some more benefits as we get into 2020 and beyond, Which we haven't so far to date.

Speaker 12

Yes. That was my next question actually. So what are the remaining, I guess, gating factors International inbound travel, are these requirements any kind of border issues that can be eased by the government or other enemies get that international travel back to prior levels.

Speaker 4

Yes, the industry and U. S. Travel have been working with the government. Remember, we went through this once before with the Obama administration, to staff back up and reduce The wait time for visas into the U. S, so that's one item that needs to be improved and We're told they expect to make some progress, though they need to get more money allocated in the budget for staffing levels.

Speaker 4

The second thing is there's an issue with China U. S. Travel because of the Ukrainian the Russian War on Ukraine and the fact that U. S. Airlines can't fly a route that goes over Russia, Which is a shorter route, while the Asian carriers can.

Speaker 4

And so there's a dispute about Effectively it's being subsidized because it's lower cost to go the shorter route. And that's unresolved as well. So that's a Diplomatic solution, not just an economic solution. So there are a couple of those things that are important to get resolved. But generally, we think, just like Americans decided finally when they felt comfortable After they've done their catch up with their families to go abroad, we think we'll see that continue to help International recover.

Speaker 4

And by the way, it is recovering every month compared to 2019. So we think that will continue.

Speaker 2

Great. Thank you.

Speaker 1

Thanks, Anthony.

Speaker 4

Thanks, Anthony. Hey, Anthony, you'll be remembered as the last question in my 1 hundredth public earnings call. So put that up on that award up on your wall. And to everyone else, thank you very much for your questions and your We appreciate you hanging in here, so we could answer everybody's questions and their follow-up questions. And we look forward to updating you through the course of the quarter, as well as after the end of the quarter in October.

Speaker 4

Have a great rest of the summer.

Operator

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines at this time and enjoy the rest of your day.

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Key Takeaways

  • Adjusted EBITDA and adjusted FFO both beat the top end of guidance thanks to operating-expense cuts, higher business-interruption insurance proceeds, and interest/tax savings.
  • The company saw a strong rebound in urban RevPAR (up 5% YoY) and occupancy (up 4.6 points) in Q2, driven by recovering business and leisure travel—including demand from major events like Taylor Swift concerts.
  • Disruptions from five major redevelopment projects trimmed RevPAR by about 180 bps in Q2, but all are now substantially complete (except the Margaritaville conversion), setting up significant share gains and cash-flow growth.
  • Pebblebrook completed $232.3 million in property sales and used $160.5 million to repurchase common shares (8% of O/S) and $16 million of preferred equity at a steep discount, boosting NAV by over $2 per share.
  • With $823 million in liquidity (including $637 million on its credit facility) and a 4.3% weighted cost of debt, the company is well-positioned to cover debt maturities and fund future investments.
AI Generated. May Contain Errors.
Earnings Conference Call
Pebblebrook Hotel Trust Q2 2023
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