Given today’s high level of economic uncertainty, there’s every reason to remain cautious about the second half of 2025, Pebblebrook Hotel Trust’s chief executive said.
During the hotel real estate investment trust’s first-quarter earnings call, Pebblebrook Chairman and CEO Jon Bortz said that while the company had a strong showing during the first three months of the year, there are factors at play that could prove challenging as the year progresses.
“We have begun to see a few concerning signs, including a slowdown in group leads for the second half of the year, a longer lag in contract execution and more caution among some meeting planners in committing to future events, particularly in the second half of the year,” he said.
Unless there’s a quick resolution to the current trade disputes, it’s not unreasonable to expect further economic slowing, which could pressure demand for meetings and hotel rooms, he said.
Sixty days ago, Pebblebrook wasn’t forecasting a reversal of the outbound-inbound international travel imbalance, but it also wasn’t forecasting that imbalance to worsen, Bortz said. However, U.S. government data shows inbound international travel dropped by 10% in March compared to 2024, a change from the improving levels in the months before.
“Given the anger and dissatisfaction around the world with the U.S. government's proposed tariff and trade policies, it's reasonable to assume some continuing negative impact to inbound international travel this year, but perhaps not as bad as the initial reaction in March,” he said.
For its 2025 outlook, Pebblebrook has lowered the top end and lowered and widened the low end of its assumptions for revenue; earnings before interest, taxes, depreciation and amortization; and funds from operations. Bortz said these shouldn’t come as a surprise as they are in response to broad-based expectations for continued economic slowing driven by the sharp rise in uncertainty created over the past 60 days stemming from changes in government policy proposals, activities and rhetoric.
“Key economic indicators, including consumer confidence, business confidence and investment and spending forecasts, have all substantially declined in the last few months,” he said. “Whether actual spending follows these declines remains to be seen.”
Pebblebrook expects operating results in the first half of the year to fall within its outlook range provided 60 days ago, with first-quarter performance beating the outlook and the second quarter achieving the lower end, combining to meet the midpoint, Bortz said. The second half of the year is why the company is lowering its outlook.
The midpoint of the revised outlook continues to reflect the expectation of the most likely outcome, he said. If U.S. trade issues are favorably resolved in the next few months, the economy could rebound quickly and put the upper end of Pebblebrook's range within reach. There’s no current financial crisis or problematic structural issues, and the economy entered the year in a strong position with full employment, accelerating corporate profits and consumers in good financial shape.
The lower range of its outlook reflects a more meaningful slowdown, including a mild recession, he said. The downside case implies same-property revenue per available room would reach the low end of its range for the second quarter and then drop an average of 3% year over year in the second half of 2025.
However, Pebblebrook’s executive team believes their intense focus on generating operating efficiencies and commitment to driving revenue, their deep cyclical experience and benefits from substantial portfolio investments have put the company in position to outperform and drive long-term value, Bortz said.
“We’re generating substantial free cash flow, and if conditions should deteriorate further, we certainly have the flexibility, the liquidity and the experience to adapt quickly,” he said.
First-quarter performance
In January and February, it seemed clear that the overall industry demand had realigned with the U.S. gross domestic product and overall economic growth, a trend that started in October 2024, Bortz said. Business transient continues to recover as more companies push employees back to the office. Leisure demand in the portfolio was healthy during the quarter and showed growth in weekend demand at Pebblebrook’s resorts and urban properties. Group demand was resilient throughout the portfolio.
The softening in hotel demand experienced in March appeared to be highly correlated to the Department of Government Efficiency activities, driving government layoffs, a spending freeze and the elimination of non-essential government travel. Canadian travelers also had a negative reaction to developments in the U.S.
Pebblebrook saw some government group and government-related conference cancellations, and most of that was outside of Washington, D.C., Bortz said. There was also a significant slowdown in government transient booking nationwide. Government and government-related group and transient travel make up about 3% to 5% of total demand in Pebblebrook’s portfolio.
“While the overall impact is marginal, it's still likely created a 1% to 2% drag on demand,” he said.
That softening pulled down Pebblebrook's RevPAR results to the bottom of the outlook range, he said. The healthy level of out-of-room spending kept them in the middle of the total RevPAR range. Non-room revenue accounted for more than 38% of total revenue in the quarter, an increase of just under 37% year over year.
Los Angeles had an especially tough quarter, as expected, because of the wildfires and aftermath early in the year that reduced demand from leisure and business travelers, both transient and group, Bortz said. Displaced residents and first responders provided a brief lift during the week of the fires and a minor benefit after. RevPAR for Pebblebrook’s nine West Los Angeles properties dropped 23.4% in the first quarter, with occupancy down 18% and rate down 6.5%.
“All nine of our LA properties had negative RevPAR, and they represented seven of our eight worst-performing properties in the quarter,” he said.
EBITDA for the LA properties fell by $5.7 million, or by 72.6%, compared to 2024, he said. It was a challenging quarter and a drag on the entire portfolio, though not as bad as forecast.
Business and leisure travelers have gradually been returning to LA as time passes along with the misperception of the widespread damage to the city.
“We're still forecasting a negative EBITDA impact in the second quarter, but the good news is we now expect it to be around $1.5 million, or about $1 million less severe than we forecasted 60 days ago,” he said.
Some lingering price competition through the summer could modestly pressure results in the third quarter, however, he added.
Outside of Pebblebrook's Los Angeles portfolio, hotel performance was strong during the quarter, Bortz said. Thirteen hotels achieved double-digit RevPAR growth, led by many of its most recently redeveloped properties, including the Viceroy Washington D.C., the Estancia La Jolla Hotel & Spa, L’Auberge Del Mar, the Harbor Court Hotel San Francisco, the Chaminade Resort and Spa and the 1 Hotel San Francisco.
“We continue to be watchful of signs that would indicate a further slowdown in demand,” he said. “So far, we haven't seen an increase in group cancellations or attrition outside of government or government-related groups and government transient. We also haven't seen a pullback in out-of-room spending, nor have we seen any increased caution among groups that are actively meeting.”
Capital use
During the quarter, Pebblebrook invested $16.7 million in capital projects, including the $15 million renovation and conversion of the Hyatt Centric Delfina Santa Monica, Co-President and Chief Financial Officer Raymond Martz said. Pebblebrook's full-year capital plan remains unchanged with expectations to invest $65 million to $75 million in the portfolio.
Over the past five years, Pebblebrook completed a comprehensive redevelopment program for the portfolio, Bortz said. Outside of the possible conversion of its Paradise Point Resort & Spa into a Margaritaville, all of the company's major projects are done.
“We’re really done with the need to go out and buy [furniture, fixtures and equipment] and do major renovation projects through the portfolio,” he said. “Most of where we’re spending capital relates to infrastructure. Most of that is not impacted by tariffs.”
The Pebblebrook team expects the hotel transaction environment to remain muted given the uncertainty, said Tom Fisher, co-president and chief investment officer.
“I think the sentiment is turned from risk-on to risk-off,” he said. “Nobody really wants to go to the investment committee today and say, ‘We’ve got this,’ until there’s a little more clarity in terms of where operating fundamentals are going to be.”
It’ll still be a functioning market, but Fisher said he's not sure how constructive it is currently. Would-be buyers are going to wait and see where things go, and if there’s any resolution to the uncertainty over the next few months, that should lead to a pickup in activity.
By the numbers
For the first quarter, Pebblebrook reported total revenue of $320.3 million, up from $314.1 million in the first quarter of 2024, according to its earnings release. It also reported a net loss of $32.2 million as compared to a loss of $27.5 million a year ago.
Same-property hotel earnings before interest, taxes, depreciation and amortization totaled $62.3 million, exceeding its midpoint expectation by $4.3 million. Adjusted EBITDARe was $56.6 million, beating the midpoint by $4.1 million.
Pebblebrook ended the quarter with $218.2 million in cash and restricted cash. It also maintained an additional $642.6 million of undrawn capacity of its $650 million senior unsecured revolving credit facility.
The weighted-average maturity of its debt was about 2.8 years with a weighted-average interest rate of 4.2%. Of its $2.3 billion in unconsolidated debt and convertible notes, 91% is effectively fixed at 4% and the same proportion is unsecured. It has no significant maturities until December 2026.
So far this year, Pebblebrook repurchased roughly 1.3 million common shares at an average price of $11.02 per share. That includes about 1.2 million shares in the first quarter at $11.22 per share and about 100,000 shares in the second quarter at $8.94 per share. Since October 2022, the company has repurchased more than 13 million shares at an average price of $14.07 per share, an approximate 44% discount to the midpoint of its most recently published net asset value per share.
As of press time, Pebblebrook’s stock was trading at $9.13, down 32.6% year to date. The NYSE Composite Index was up 1.5% for the same period.