The demand shaping up for Pebblebrook Hotel Trust's portfolio is promising, but executives are wary of the overall economic environment.
During the hotel real estate investment trust's fourth-quarter and full-year 2023 earnings call, Pebblebrook Chairman and CEO Jon Bortz said there is clearly a softening in overall hotel demand, with most of it occurring in the middle to lower segments.
That’s likely due to consumer concerns over inflation, the wearing down of savings built up during the pandemic and the increase of credit card debt, he said. It could also be the result of difficult year-over-year comparisons in this segment.
Total hotel industry demand hasn’t exceeded the restricted supply growth since March 2023, and it’s been negative for seven of the past 10 months, Bortz said. This has happened while convention, group, business transient and international inbound travel segments have continued to recover.
Leisure demand remains healthy, but the top 25 markets have outperformed other markets by a wide margin, with urban markets performing the best after a slower recovery, he said.
Though the softening demand has been mostly focused on the middle and lower hotel segments so far, Pebblebrook’s team isn’t ruling out similar softening in the higher segments at some point, Bortz said.
“We’re humble, and we recognize we've never been through a pandemic and recovery before, let alone one where the [Federal Reserve] continues to work aggressively to slow down the economy to bring inflation down to its target,” he said.
Once the industry can get over the hurdles created by the Fed’s efforts to drive down inflation, Pebblebrook expects restricted supply growth and a strong economy to power performance across its portfolio, Bortz said.
“These positive fundamentals in totality coupled with a moderating inflation outlook and significant benefits from the completion of our strategic redevelopment program should lead to very strong bottom-line performance for us over an extended number of years,” he said. “We just need to get over this macro hump.”
2024 Outlook
Given the weak overall trends over the past 10 months, including January and February so far, Pebblebrook expects total hotel industry revenue per available room will be flat to up 2% this year, Bortz said.
That also assumes a “so-called soft landing” for the economy, he said, adding that later expectations for Fed interest rate cuts are behind a more conservative outlook.
Group, transient and international inbound travel will all continue to recover, he said. These demand segments will benefit the upper-upscale segment and urban markets primarily.
Pebblebrook expects to substantially outperform the U.S. industry given its roughly 60% concentration in major urban markets, Bortz said. The company expects less material disruption in its portfolio this year from renovations while also gaining RevPAR share thanks to its completed renovation projects.
Pebblebrook projects its own RevPAR to grow between 2% to 4%, with most or all of that growth to come from occupancy gains. Total revenue is forecast to increase between 3% and 4.6%. These figures exclude the LaPlaya Beach Resort & Club in Naples, Florida, because of ongoing repairs after the resort was damaged by Hurricane Ian in September 2022.
Group booking pace is strong so far, Bortz said. As of the beginning of February, group bookings pace for the year was up 12.5% compared to this time in 2023 with average daily rate pacing above 2%. Total group revenue is pacing ahead by 14.7%.
Transient room nights are pacing ahead by 9.4%, but rate is down by 1.9%, he said. Total group and transient are pacing ahead by 11% in room nights and revenue with ADR flat year over year.
“While total pace is strong, we caution that booking trends have lengthened and continue to normalize, so these percentages will naturally decline as more business is put on the books,” he said.
Pebblebrook’s urban hotels are pacing stronger than the resorts, but both are still ahead of last year, he said. Currently, the third quarter has the strongest pace advantage, followed by the fourth quarter, second quarter and then the first. Group will represent about 28% to 29% of its overall mix, a slight increase compared to last year.
Total revenue growth is expected to pace ahead of last year partly due to strong food and beverage sales, stronger group demand and the renovation work at many of its hotels, he said.
Capital Reinvestment
Co-President and Chief Financial Officer Raymond Martz said that through 2023, Pebblebrook invested $152 million into its portfolio, focusing on six major redevelopment projects at the Margaritaville San Diego Gaslamp, the Hilton San Diego Gaslamp Quarter Hotel, the Estancia La Jolla Hotel & Spa, the Jekyll Island Club Resort, the Southernmost Beach Resort and the Newport Harbor Island Resort.
For 2024, the company is looking at three main projects: the $29 million transformation and upscaling of the Newport Harbor Island Resort; the $26 million luxury repositioning of the Estancia La Jolla Hotel & Spa; and the $20 million first phase of adding additional alternative accommodations at Skamania Lodge.
“We anticipate completing all of these projects in the second quarter, marking a significant milestone in our comprehensive $540 million multiyear strategic capital reinvestment program,” he said.
Most of the returns on these capital projects have not yet been realized, and the company expects significant improvement in market share and cash flow as the returns ramp up, he said. The major redevelopment disruptions are largely behind the company now.
The repairs to the LaPlaya Beach Resort & Club in Naples, Florida, are nearly complete, Martz said. The restoration of the 79-room beach house and pool complex should be finished in a week or two.
The company expects to receive $11 million in business interruption proceeds this year for lost income during the second half of 2023 and early 2024, he said.
By the Numbers
Pebblebrook reported a net loss of $74.3 million for 2023, according to its earnings release. Total RevPAR grew by 5.9% compared to 2022 while hotel earnings before interest, taxes, depreciation and amortization of $350.9 million was down 2.6%.
For the fourth quarter, the company reported total RevPAR grew by 5.7% year over year. Same-property hotel EBITDA reached $66.6 million.
Pebblebrook sold seven properties through the year for approximately $331 million in gross proceeds, which it used to reduce its outstanding debt and repurchase common and preferred shares. The aggregate sales proceeds reflect a combined 20.2-times EBITDA multiple.
By year's end, Pebblebrook had $830 million in liquidity, comprising $193.6 million in cash and equivalents as well as $636.4 million in undrawn availability from its senior unsecured revolving credit facility.
Its current $2.2 billion of consolidated debt and convertible notes has an effective weighted-average interest rate of 4.6%. Three-quarters of the combined debt and notes are fixed at an effective weighted-average of 3.6%, while the remaining amount is floating at a weighted-average interest rate of 7.7%. Approximately 91% of its outstanding debt is unsecured, and the weighted-average maturity of its debt is 3.2 years.
Pebblebrook addressed all of its material 2024 debt maturities by extending $357 million of its $460 million October 2024 maturity term loan to 2028. The REIT also paid down $157.6 million of its existing debt, including $110 million of 2024 and 2025 maturities.
As of publication time, Pebblebrook’s stock was trading at $16.19, up 2.2% year to date. The New York Stock Exchange Composite was up 4.3% for the same period.