Greetings, and welcome to the Pebblebrook Hotel Trust Second Quarter Earnings Conference. At this time, all participants are in a listen-only mode. A 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, Mr. Raymond Martz, Chief Financial Officer. Thank you, sir. Please go ahead.

Thank you, Donna, and good morning, everyone. Welcome to our second quarter 2021 earnings call and webcast. Joining me today is Jon Bortz, our Chairman and Chief Executive Officer. But before we start, a quick reminder that many of our comments today are considered forward-looking statements under federal securities laws. These statements are subject to numerous risks and uncertainties as described in Pebblebrook's SEC filings, and future results could differ materially from those implied by our comments. Forward-looking statements that we make today are effective only as of today, July 30, 2021, and we undertake no duty to update them later. We'll discuss non-GAAP financial measures during today's call, and we provide reconciliations of these non-GAAP financial measures on our website at pebblebrookhotels.com. Okay. On to the highlights of the second quarter. We are deep into the summer travel season, and it's clear that the leisure traveler is back and with a vengeance, and that business travel is gaining momentum as well. Overall demand in the second quarter was robust and much stronger than we expected just 90 days ago. Same-property revenues of $162.5 million were down 57.8% versus the same period in 2019. This was a significant improvement from the first quarter when same-property revenues were down 74.7% versus 2019. Sequentially, same-property revenues grew 95.4% from Q1 to Q2. More encouraging is the accelerating demand that we experienced throughout the quarter. June same-property revenues were more than 50% higher than April, and July is expected to be almost 20% higher than June, an encouraging turnaround in such a short time. These increases are not just at our resorts but also at our urban hotels. We have seen a resurgence in business travelers, as they are clearly getting back on the road, and we expect this trend of improved business demand, both transient and group, to continue during the third quarter. We anticipate leisure demand to slow down post Labor Day, as is typical with the end of summer when kids return to school. Obviously, the Delta variant and its impact on travel demand for the fall is hard to forecast today, but we have not seen or experienced any notable declines in booking trends or cancellations so far. Jon will provide insight on our current post-summer booking trends later in the call. This accelerating strength in hotel demand during the second quarter allowed us to generate $17.1 million of adjusted EBITDA. This is a dramatic improvement compared with a negative $25 million of adjusted EBITDA for the first quarter of 2021 and demonstrates the rapid turnaround for our portfolio, and the results improved substantially every month throughout the quarter. This is critical as we live in a sequential recovery world right now. Adjusted FFO per share was a negative $0.12 per share, better than the negative $0.42 per share from the first quarter. Most encouraging, we generated positive corporate cash flow in June, and we expect to generate positive adjusted FFO and cash flow in the third quarter. Drilling down to our hotel operating results for same-property RevPAR versus the comparable period in 2019, April was down 66.3%, May was down 60.1% and June was down 51.6%. We're forecasting July to be down 38% to 42%, continuing the very positive recovery trend. For the third quarter, we currently expect RevPAR to also be down between 30% and 42% compared with the comparable period in 2019, which also continues the improving quarterly trend. Total hotel level expenses of $134.2 million were reduced by 45.1% versus Q2 2019. Expenses before fixed costs, like property taxes and insurance, were cut by 50.9%. Our total property-level expense reduction was 78% of the revenue decline and 88% before fixed expenses, pretty incredible, frankly. Our eight resorts generated a positive $28.4 million of hotel EBITDA in the quarter. This resulted from an occupancy of 66% at an average daily rate of $386, which is more than $107 and a 38% increase over the comparable 2019 second quarter. As a result, total revenue per occupied room was 17% higher than Q2 2019. This allowed our resorts to produce $28.4 million of EBITDA in the second quarter, a 17.5% increase over the comparable period in 2019 and a $13.9 million improvement, almost doubling from Q1. EBITDA margins were up an impressive 622 basis points from Q2 2019. Urban hotels also made great strides during the second quarter as well. Occupancy was 33.3%, ADR reached $198 and total revenues were $91.6 million. Urban hotels were just under the breakeven level in second quarter with a negative EBITDA of just $0.8 million. Yet in our sequential world, our urban hotels achieved $5.3 million of EBITDA in June with a 43.5% occupancy and a $210 ADR. Impressive results considering the still low occupancy levels in our urban markets and operationally, not something we would have thought possible before the pandemic started. We want to thank all of our hotel operating teams for their perseverance, hard work and creativity during the most severe downturn our industry has ever experienced. We had general managers parking cars and cleaning floors, directors of sales moonlighting as front desk agents, and many other managers cleaning rooms, serving guests and performing many other jobs that our hourly employees previously did. This is not anything they signed up to do. But with a shortage of hourly workers, our dedicated and committed hotel management teams stepped in. Our company's management team, Board and our shareholders greatly appreciate their leadership and their self-sacrifice. Shifting to our capital improvement program. In the second quarter, we completed an $11.7 million redevelopment of L'Auberge in Del Mar in South California. In early July, we commenced the $25 million transformation of Hotel Vitale to 1 Hotel San Francisco and a $15 million comprehensive guest room renovation at the Southernmost Resort in Key West. We expect the 1 Hotel to be completed by the end of this year and Southernmost early in the fourth quarter. For 2021, we anticipate reinvesting a total of $70 million to $90 million in the portfolio, which is in line with our prior estimate. Shifting to our investments program. You may have noticed that we had a busy quarter taking care of business. On April 1, we completed the Sir Francis Drake Hotel sale in San Francisco. And then on June 10, we closed on the sale of our leasehold interest in the Rouge, New York. And last week, we executed a contract to sell Villa Florence San Francisco on Union Square. Combined with previous sales we completed since June of last year, this represents approximately $330 million of sales proceeds to reallocate into other assets. And as we previously announced, we've already had two reinvestment opportunities that we believe would generate substantially better risk-adjusted returns for our shareholders. In late June, we executed a contract to acquire Margaritaville Hollywood Beach Resort in Hollywood, Florida for $270 million. This acquisition is anticipated to be funded from existing cash on hand and through the assumption of $161.5 million of favorably priced existing nonrecourse property debt. We are targeting to complete this acquisition by the end of Q3. And last week, we completed the acquisition of the iconic Jekyll Island Club Resort for $94 million. Jon will provide more detail on why we're excited about this investment and the upside opportunities of this unique resort. As a result of these property sales and acquisitions, and assuming Villa Florence is sold and Margaritaville is acquired, our 10 resorts will comprise roughly 23% to 24% of our 2019 same-property EBITDA. Our San Francisco share in 2019 dollars were declined to 19% with 10 properties, and our Southeast focus will increase to 15% with five resorts and one hotel. Of course, the world moving forward will be different, and we expect these 10 resorts will likely represent a more significant percentage of our EBITDA on a go-forward basis than they did in 2019. Turning to our balance sheet and liquidity. We are also taking care of business in this area. On May 13, we raised $230 million of capital through our 6.375% Series G preferred equity raise. On July 27, we successfully raised $250 million through our 5.7% Series H preferred equity raise, the largest preferred offering ever in the lodging space and equal to the lowest rate ever. This raise refinances an equivalent amount of higher price redeemable preferred securities, our 6.5% Series C preferred shares and 6.375% Series D preferred shares. This effect of $250 million swap will reduce our preferred dividend payments by approximately $1.8 million annually or $0.014 per share. After completing our Jekyll Island Resort acquisition, we have approximately $875 million of liquidity, which includes roughly $230 million of cash on hand and $644 million available on our unsecured credit facility. We also have approximately $235 million of reinvestment proceeds available under our current bank arrangements. We're proud of the tremendous progress we've made strengthening our balance sheet, reducing near-term debt maturities, and lowering our cost of capital through our various preferred refinancings and convertible notes offerings while also increasing our liquidity. This positions us to take advantage of additional new investment opportunities as they become available. And with that, I'd now like to turn the call over to Jon. Jon?

Thanks, Ray. So I thought I'd focus on what we're currently seeing in our business and how we think the rest of the year is likely to play out. Though the path continues to be a path with uncertainty given the rise of the Delta variant. We're certainly very encouraged by the consistent increases in demand we've experienced each month, the robust level of leisure demand that is well outpacing 2019 levels, the continuing acceleration in business travel and forward bookings, our ability to push our average rate closer and closer to 2019 levels and our ability to operate our hotels with new operating models and greater efficiencies. In Q2, occupancies rose significantly every month on a sequential basis, even as we opened our remaining hotels in softer markets in our portfolio. Those gains drove RevPAR higher as rates also gradually increased. April RevPAR was 22.4% higher than March, May was 20.3% higher than April and then June rose even more, up 32.1% to May. We think July will be up 25% to June. We estimate that business travel doubled from the first quarter and probably recovered to about 30% to 40% of 2019 levels by the end of the second quarter. The airlines, who certainly have more visibility than our industry, have indicated they believe that business travel will improve to 50% to 60% of 2019 levels by the end of the third quarter, with further improvement through the end of the year and into next year. Their forecast seems reasonable given the bookings we've been seeing and the significant advances each month in urban weekday occupancies, which improved from 24.5% in March to 39% by June, and they look like they'll be up to around 47% or 48% in July. Overall, urban occupancy rose from 29.5% in March to 43.8% in June, just below our overall portfolio occupancy for June of 46.4%. July looks to be over 52%. Most companies have already changed their travel policies, allowing either vaccinated employees or all employees to travel again. Our property teams report seeing travel from most of our corporate accounts throughout our portfolio. Businesses are definitely getting back to travel, both transient and group. For our portfolio, we saw continuing improvement in all of our markets and at all of our properties. But outside of our resorts, we saw the most advances in Boston, San Diego, Los Angeles, Seattle, and Portland. Chicago, San Francisco, and D.C. are recovering more slowly, primarily a result of their later reopenings. We believe the recovery is about three to four months behind the faster-recovering urban markets. In July, looks like occupancies at our properties in San Francisco will average around 30%; L.A., 64%; San Diego, 74%; Portland, 58%; Seattle, 58%; D.C., 34%; and Boston at 66%. Boston has recovered very strongly in the last two months. We are also encouraged that we're seeing forward transient bookings pick up as well as the leisure customer feels increasingly confident about booking vacations and leisure trips further out. The lengthening of the booking window gives us more visibility to schedule our staff and operate our hotels better, and it improves our ability to revenue-manage more confidently and push rate more. When it comes to room rates, we've seen consistently strong growth in ADRs throughout our portfolio. All eight of our resorts are achieving significant increases over 2019 levels. Ray already discussed their combined rates in Q2, so I won't repeat that, but I thought I'd provide some impressive specifics because not only is the rate growth at our resorts a result of leisure compression and a general lack of consumer rate resistance, but it's a result of the repositioned nature of our resorts following large investments we made improving these very unique properties. For example, ADR year-to-date at LaPlaya in Naples is up $159 or 34% from the first half of 2019. And ADR for business on the books in both Q3 and Q4 is ahead by a whopping $250 versus the same time in 2019 or roughly 100% increase in Q3 and 70% in Q4. Over the year, LaPlaya has consistently climbed higher in the TripAdvisor traveler rankings, reflecting the increasing desires of leisure guests and groups to choose our redeveloped and more luxurious resort. And consider this, total room revenue currently on the books at LaPlaya is $5.8 million ahead of total room revenue achieved for all of 2019, and we're only in July with five more months to book into this year. On the other side of the country, at L'Auberge Del Mar in Southern California, where we just completed a highly impactful $11.7 million luxury redevelopment in Bay, we're booking at dramatically higher rates as we reposition this property to an even higher tier. In June, we achieved an average rate of $258 or 66% higher than for June 2019. July is running even higher. Rate currently on the books for July is at $878. That's $372 or 73% higher than July 2019. This past weekend, the resort ran 97% at a rate handily over $1,000. At Paradise Point just down the road in Mission Bay, San Diego, Q3 ADR on the books is currently at $450 versus $269 for Q3 2019. Transient revenue on the books for 2021 is already $2.8 million ahead of total transit revenue achieved for all of 2019. Just across the water from Paradise Point at San Diego Mission Bay Resort, which was a Hilton when we acquired LaSalle and where a year ago we completed a $32 million multiphase transportation transformation of the property into a luxury independent resort, ADR is climbing as well compared to 2019. In Q2, we achieved a 23% higher rate than Q2 2019 as we established this new independent resort and gained significant ADR share versus our market competitors. For Q3, as we gain momentum, ADR on the books is currently ahead by $115 or 46% compared to Q3 2019. At The Marker in Key West, we've also gained ADR and RevPAR share on our competitors following the $5 million of upgrades we made in 2019 at this small 96-room resort. In Q2, ADR was up 45% or $143 to $459 compared to $316 in Q2 '19. The third quarter is running $157 or 65% higher versus Q3 2019. And I could go on and on about our other resorts as well. But we've been pushing rates higher at our urban properties as well as leisure and business travel returns to cities. While in most cases we haven't yet achieved rates higher than 2019, we have grown our city ADR significantly since the pandemic recovery earlier this year, even as we reopened our hotels in the slower-to-recover markets, like Chicago, San Francisco, and D.C. Average rate for our urban hotels has grown every month from a low of $155 in January to $158 in February to $160 in March to $175 in April, $196 in May and finally reaching $206 in June. In July, we look to be up again as ADR achieved at our urban properties has increased another 10% from June at $227 through July 25, and rate on the books for the fall is running even higher. Some of our better-quality and recently redeveloped urban properties, which also have strong leisure appeal, are closing in on 2019 rates. At The Nines in Portland, where our luxury collection hotel is the market rate leader and the only luxury property in the city, ADR in the second quarter was down just 7% in Q2 at $250, and our rate on the books is currently running 9% higher than third quarter 2019. The Nines benefits from its number one position in the city and its high-quality suites and event spaces that appeal to high-end leisure and business travelers. We're also seeing both leisure and business travelers buy up to suites in higher-priced rooms, and that is helping us as our unique lifestyle urban properties recover rate more quickly than more typical commodity hotels in our markets. At the Mondrian in West Hollywood, where we completed a major comprehensive renovation just two years ago, ADR in Q2 recovered to within 4% of Q2 2019. Third quarter ADR on the books at Mondrian is currently within 1% of same time 2019 and Q4 rate is up over 10% compared to same time 2019. Le Parc in L.A., which received an $80,000 per key upgrading and repositioning just a year ago, is also closing in on 2019 rates on its way to even higher rates. In Q2, ADR was down just 5.5% from Q2 '19. Q3 is looking to close the gap further and Q4 rates on the books are running ahead of Q4 same time 2019. In Boston, at The Liberty, which is one of the most unique and popular higher-end properties in Boston, we've achieved a $332 ADR month-to-date through July 25, and it's doing this at an impressive 86% occupancy level. While we're not yet back to the $375 rate and 97% occupancy we achieved in July 2019, The Liberty, like our other properties in Boston, has certainly come back a long way from January's 30% at $186 and April's 61% at $210. I could provide more examples of the individual property results that are behind the urban portfolio ADR recovery we're achieving, but we must move on. As you know, this downturn is unlike any prior cyclical downturn, and it would seem that this recovery will be unlike any prior recovery. With robust macroeconomic fundamentals, the consumer with record amounts of savings, net worth and a pent-up desire to travel and vacation, and with business profits at record levels and businesses with a significant pent-up desire and need to travel, we believe it's likely that this recovery will be swift, with demand returning much more quickly than we previously thought and rates recovering much more rapidly as well as evidenced by the progress we've already made on rates. In fact, we're currently forecasting that July's same-property ADR will reach $270 to $275, which will exceed July 2019's ADR by $5 to $10. We expect to continue to benefit from the quality and uniqueness of our properties, their strong appeal to both leisure and business travelers, and the vast repositioning investments we made in the last few years, those we're currently making, and those upcoming repositionings we expect to undertake and complete in the near future. Of course, the benefit of gaining rate back quickly and gaining material rate share at all of our recently repositioned hotels and resorts is gaining an ability to drive profitability and margins much higher than 2019 and do it much more quickly than in a typical cyclical recovery. Not only have we rebuilt our individual property business models to operate more efficiently, but gains in our rates will naturally flow much more substantially to the bottom line. We've also achieved efficiencies from creating operating clusters in various markets, which is something we started pre-pandemic. Because of the turnover that took place following the shutdown of our properties last year and the rebuilding this year, we've been able to cluster even more of the senior positions where we have multiple properties with the same operator in the same market. These clustered positions often include general management, sales and marketing, revenue management, food and beverage, HR, accounting, and even engineering. Our properties in Santa Monica, San Diego, Portland, San Francisco, Seattle, and D.C. have almost all been clustered, yielding significant operating synergies while optimizing performance through the increased quality of the overall clustered personnel. These savings are permanent and run in the hundreds of thousands of dollars per clustered property. Ray already talked about the operating cost savings achieved in Q2 versus our revenue shortfalls compared to 2019, so I won't repeat those numbers. But when we look forward, we expect to continue to close the gap on EBITDA margins to 2019 as revenues and room rates continue to recover. For example, in June, with total revenues down 50% from 2019, our hotel EBITDA margin was 23.7%. But for July, with 20% sequential growth in revenues, our hotel EBITDA margin should recover to around 27% to 28%. While this is still lower than the 35.5% achieved in July 2019, it's a lot closer in a much shorter time than we were expecting just three months ago. As we stated previously and still believe today, we expect to recover to 2019 EBITDA before getting back to 2019 RevPAR, and we now believe we're likely to get back to 2019's ADR levels before getting back to 2019's RevPAR as evidenced by our current July ADR expectations to beat 2019 July ADR. In addition to transient, groups are returning as well, and we've begun to see in the month for the month business group bookings in addition to an increasing volume of business group leads, RFPs, site visits, requests for contracts, and bookings. While we're not yet booking at pre-pandemic levels, activity has been progressing towards those prior levels, and bookings each month for this year and next year are increasing monthly. Yet not surprisingly, group revenue on the books for Q3 and Q4 is down about 64% and 54%, respectively, versus same time in 2019 for the same quarters. Group on the books for 2022 has been growing. And as of July, we had about 32% fewer group nights on the books, but it's at a 5% higher ADR as compared to the same time in 2018 for 2019. The group deficit is not surprising given corporations are just beginning to get back to their offices and refocus on booking group meetings. This gap should begin to shrink later this year as businesses gain confidence in getting back to normal. We expect group bookings to be more short-term until behavior stabilizes at the new normal. Citywides are booking rooms throughout our markets in 2022, including in cities like San Francisco, where 2022 kicks off with the JPMorgan Healthcare Conference in early January where groups have been actively booking rooms at our hotels for the conference. With June achieving positive cash flow and therefore, positive FFO, the recovery has progressed faster than we expected. And if the Delta or some other variant doesn't drive our economy and mitigation measures backwards, we certainly expect room revenues, total revenues, and EBITDA to continue to recover. In Q3, EBITDA should continue to climb from June as previously discussed. August is likely to flatten out or decline slightly, including in terms of its percentage recovery to '19 as the prime vacation season winds down in the second half of the month and kids presumably begin to go back to school. While at the same time, we don't expect business travel gains to accelerate until the post-Labor Day period. September should then pick up the recovery pace, particularly after the Jewish holidays by mid-month, which should continue through the rest of the year as business travel continues its recovery and leisure travel and social groups remain at elevated levels. When we think about 2022, we're focused strategically on the year being a very strong recovery year overall. Groups should be very healthy as we believe there's a great deal of pent-up demand. We also think that leisure will continue to be robust with continuing pent-up demand for vacations and getaways, while outbound international travel probably remains more limited. This means we don't expect rate discounting in 2022. Again, this is with the obvious caveat that we get to relatively normal behavior by the end of this year and it remains relatively normal next year. As it relates to the few remaining redevelopment projects we deferred due to the pandemic, we're continuing to complete plans and permitting and will likely pull the trigger on these few remaining projects as soon as the approvals are complete and it's the right time of year to commence them. All of our redevelopments and transformations, including a large number in the last few years, and all of the current and upcoming projects will provide very significant upside for our portfolio over the next few years as the recovery rolls forward. Importantly, the vast majority of the dollars for these projects has already been invested. As we look at the silver lining of potential upside from the crisis, we continue to expect there will be significant opportunities over the next few years to acquire highly desirable properties at the lowest-risk time in the cycle at attractive returns with significant upside opportunities for us to use our expertise to improve performance. In this regard, as previously announced, we've been successful tying up two very unique resort properties that we believe have very significant upside from operational and physical improvements, including numerous opportunities to remerchandise them, add and enhance amenities, and better utilize both indoor and outdoor areas to drive higher rates, more revenues, and increased EBITDA and NOI. We believe the Jekyll Island Club Resort we just acquired last Thursday is the quintessential Pebblebrook investment. That being an extremely unique lifestyle independent property with an almost unlimited list of opportunities that we'll be able to execute on for many years to come. In this case, very similar to what we've been accomplishing at Skamania Lodge over the last 10 years, and with much more to come there as well. Some of these opportunities include upscaling the rooms throughout the resort, transforming the Ocean Club property into a more exclusive resort as well as dramatically improving each of the three mansion buildings to create a more elevated and more personalized service experience that takes advantage of each building's unique historic architecture and interior finishes. This would be similar to what we did with the two historic bread and breakfast buildings at Southernmost Resort in Key West where we consistently achieve $100 to $200 or more in rate premiums than the rest of the resort because of the higher personal service and special exclusive club atmosphere that was created and that higher-end guests find very appealing. Jekyll Island itself has been growing as a desirable drive-to regional vacation and meeting market as the improvements on the island and those currently planned by the Jekyll Island Authority drive the increased desirability of this unique island destination. We're extremely excited about this acquisition, bringing on Noble House as our operating partner and the vast number of improvements that we'll be planning and executing together. As a reminder, Noble House operates a long list of independent, unique, high-end resorts and hotels, including LaPlaya Beach Resort & Club, San Diego Mission Bay Resort, and L'Auberge Del Mar with us. As it relates to the upcoming acquisition of Margaritaville Hollywood, we'll be in a position to discuss the opportunities there in more detail once the acquisition is completed. We continue to be active in our pursuit of additional new investment opportunities, and we'll be sure to update you as and if we are successful. We believe we have significant competitive advantages pursuing new investments opportunities as they arise. These include our ability to operate our properties more efficiently than the vast majority of buyers, the additional cost savings from the economies of scale generated by curator, our unique strength in redevelopments, transformations and independent or small brand lifestyle hotels, our vast number of operator relationships and our high-profile and very positive reputation in the industry. And with that, we'd now like to move to the Q&A portion of our call. So Donna, you may now proceed.

Thank you. Ladies and gentlemen, the floor is now open for a question. Our first question is coming from Dori Kesten of Wells Fargo. Please go ahead.

For Jekyll Island and Margaritaville, how have your expectations for 2021 EBITDA changed since you underwrote them?

Yes. So well, they've gone up a lot. When we were underwriting them, I think our view was that it would be a couple of years to get back to 2019 levels. I think in the case of Jekyll, we now expect to be well advanced beyond 2019 levels, I think upwards of $1.5 million or more at the bottom line. And then Margaritaville, at this point, we don't yet think we'll get back to 2019 levels. I think right now, we're forecasting to be about $3 million or $3.5 million shy. That's about $2 million better than what we underwrote and when we agreed upon the pricing for that property.

Okay. And just a follow-up. A few quarters ago, Tom said New York City was no longer red line for acquisitions. Has there been anything in that market or the top 10 urban markets that sparked your interest? Or do you think the vast majority of deals we'll see early in the cycle will be more leisure resort weighted for you guys?

We are very open to making acquisitions in 35 different markets that we've thoroughly researched and built a database for, which is about 15 to 20 more than our historical investments. Additionally, we are considering drive-to resort properties located anywhere across the 48 states. In urban markets, our investment decisions will depend on availability and our assessment of attractiveness. Our focus will remain on assets where we can add value through redevelopment, repositioning, operator changes, and applying our expertise in operations, while not overpaying for those opportunities. Regarding New York specifically, although we haven't ruled it out, it's a challenging market for us to enter. We anticipate that achieving meaningful cash flow will take a considerable amount of time. The market is expected to experience a slow recovery due to its heavy reliance on international travel, which is still limited. This makes it more appealing for private investors who can afford to wait for cash flow, but for a public company like ours, the risks associated with this market—including interest rates, union challenges, and real estate taxes—make it difficult to find the right deals at the right prices. While we wouldn’t completely dismiss New York, we believe the likelihood of acquiring something there is very low. This sentiment may also apply to other major urban markets that are slow to recover, such as Washington D.C. or Chicago. We have a couple of properties in those areas. In San Francisco, we’ve reduced our exposure as we have acquired and sold properties elsewhere during and before the pandemic. We feel confident about the recovery in those places, but we’re not certain we'll be making additional purchases there. Overall, we are comfortable with what we currently hold.

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

This is also another question. I'd like to hear your thoughts about some other specific transaction trends. You're not alone as acquirers of resorts as of late as of other REITs and private companies. Some of the pricing on a per-key basis is well north of $1 million a room. And we've also heard of some uber-luxury resorts worldwide that are being marketed for well north of $2 million a room, which perhaps to me suggests as that rock band for Winnipeg would say, you ain't seen nothing yet. I'm curious to hear your thoughts on what you think about this pricing, does it seem reasonable to you? Do the trading multiples make sense either on a historical or forward basis? And not to interject any of the questions, but if you're willing to share, I'm just curious how you think about resort transaction pricing today impacting your view of your own resort's valuation?

Sure. I want to clarify that we don't feel comfortable discussing the transactions of others. It's best to talk directly with them about their views on values and future performance. In our case, we can only acquire what is available in the market, which currently consists of two main types of properties. One type includes resorts and urban properties in markets that are recovering quickly, while the other consists of select-service and defaulting properties in suburban and secondary areas. We are not interested in the latter. We aim to find non-commodity properties, and the market has recently been focused on leisure properties, which tend to be marketed to a small group of investors. For instance, the Jekyll Island property was acquired by the same partnership that bought the Sir Francis Drake, showcasing a strong link in that opportunity. When considering transactions, the ones that tend to gain attention are the properties performing well. Urban properties, like those sold in Monaco and Baltimore, don’t make the headlines, especially when sold at high values. Some may think that Pebblebrook is shifting its strategy to acquire resorts, but that is not the case. Our focus remains on 35 urban markets and drive-to resorts where we can add value, which is where we will continue to concentrate our efforts. Regarding the two properties we acquired, we secured them in early April and early May, at a time when the market in the southern U.S. was just starting to show improvement. The premium rates and performance were not anticipated by us or reflected in the sellers' expectations. Consequently, we acquired attractive properties at competitive prices, including Margaritaville, which leads the market in Lauderdale Hollywood. On the topic of our portfolio, I believe most resorts are currently trading at or above 2019 values, which I expect will apply to our assets as well. It's worth noting that we have heavily invested in enhancing our resorts, as shown by the average daily rates we are achieving, which exceed the market growth. This investment is yielding positive results and is expected to continue. Our team recently gathered insights from the brokerage community, prompting us to reassess our internal net asset value, as the market has shifted significantly in the past three months, affecting our resort properties as well.

I mean, for me, it's not an issue. It's at least just more my intellectual curiosity as just being interesting and fast-moving trends taking place. So I appreciate all the insights there. My follow-up, I'll try to be pretty brief. You spoke to unique properties and Jekyll Island seems as if dealt from my seat. I'm curious, I don't suspect that this is that well known of a hotel by some on the call, maybe I'm wrong. But it's not in a major metro, maybe 70 minutes or so driving distance from the next biggest city. Could you provide some greater detail as to why you chose to buy that particular hotel given its small-town location? And maybe more broadly, what appeals to you about the island destination over the longer term?

I wasn't familiar with Jekyll Island when Tom first mentioned it. However, we found it appealing because we know Sea Island well, which is quite upscale, especially with the cloisters and lodge. Although we were less familiar with St. Simons and Little St. Simons, we recognized they are more commercialized than Jekyll Island. Our research revealed that Jekyll focuses on nature, wellness, outdoor activities, and sustainability, which aligns with our values for our properties and resorts. The unique historical aspect of Jekyll creates a significant advantage, especially since future development plans from the Jekyll Island Authority aim to be quite limited. We see Jekyll as potentially akin to Lanai or Kauai, offering an attractive option within the Golden Isles. Additionally, with Jacksonville only 70 minutes away, easy access to I-95, and a relatively short drive to Atlanta, it supports our model of having resorts near major markets or airports, although Jekyll is more leisure-focused and caters to small group meetings. Being closer to Jacksonville than Sea Island enhances its appeal for us. That summarizes our perspective on Jekyll, and I'm open to discussing it further if needed.

Thank you. Our next question is coming from Rich Hightower of Evercore ISI. Please go ahead.

I'll just add that as a native Georgian, I know all about Jekyll. So you guys should have called me before you started bidding, but just a quick question on leisure. Maybe given some of the kind of anomalies in the macro environment where we think about stimulus this year, we think about pent-up demand coming out of COVID lockdowns last year. I mean what are the chances that leisure underperforms in 2022 if this year is indeed an anomaly? And then I'm also curious for what your guest satisfaction scores look like right now to the extent that labor bottlenecks are impacting service, especially at the resorts.

Sure. We believe that leisure will be stronger next year compared to this year. In our portfolio, the first quarter in Florida was significantly worse than in 2019. Southern California, and much of the West Coast, was largely closed during the first few months of the year, and many people didn’t get vaccinated until May and June. We think the strong desire to travel among leisure customers will persist. The environmental stress, particularly with the Delta variant, remains a factor. When considering leisure travel and consumer financial conditions, while there has been some additional stimulus, the direct financial support for our customers has been minimal. It's not primarily the travelers to our resorts who received stimulus payments. The customers we see generally belong to the upper upscale socioeconomic demographic. Given the strong nature of the economy and that we are experiencing more late-cycle economic activity, we believe this trend will not only continue but is likely to increase over the next 12 to 18 months.

Okay. And then on the guest satisfaction...

Yes, on the guest scores. So it's interesting. I mean, our guest scores, I haven't looked at all of them, and I haven't seen a portfolio roll up. But I would say, because of the investment dollars we've been making in the portfolio, our guest scores are actually up. And in the markets where we struggle with providing the same level of services pre-pandemic, we're not alone in those markets. It's pretty much across the spectrum in a place like Key West. So we haven't seen declining scores. And in fact, we've generally seen the opposite, which I think is more specific to our portfolio, Rich.

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

Just one question for me, just back to all the ADR information you provided was helpful, but maybe on resort fees and urban amenity charges. I know this doesn't get captured in ADR, but what have you done here? What have you brought back? And any customer pushback so far in those charges would be helpful.

Yes. So I think we've returned guest amenities and the services and products as well as the fee to all of the properties that had them previously. The pushback has been limited and frankly, no different than pre-pandemic when it's very, very minor. And I think it's increasingly being accepted, particularly in the urban markets. We had to restructure some of the packages to provide value to the customer. And because some things that were in the packages were either no longer available or were not going to be of interest to the customer, we've swapped those out with other opportunities within the products and services that we're providing. And our capture rate, our average capture rates, not surprisingly, are much higher because it's such a higher percentage of leisure where the fees are very well accepted.

Got it. And then just would it be fair to assume that all those ADR percentages that you gave, if you included all the other fees that don't get counted, are they fair to assume that the percentage change versus '19 levels is actually higher than the numbers that you quoted because of all the other fees that are there?

Yes.

Thank you. Our next question is coming from Shaun Kelley of Bank of America. Please go ahead.

I'll keep it relatively short. But I was hoping we could change gears a little bit and talk about your sort of urban margin structure. I think, Ray, if I caught the comment correctly, you made something like $5 million or so in EBITDA in the urban portfolio in June. And I'd just like to get a little bit more color on your thoughts around the margin structure there going forward. How much are you benefiting from mix today versus how much is that kind of rate versus occupancy? And then kind of going forward, how do you see that side of the portfolio kind of recovering margin relative to maybe some of the outsized gains you're seeing on the resort side?

Yes, I believe revenue is a critical issue for us. Looking at our open urban hotels in June, our GOP margin was over 33% compared to 47% in June of 2019. If we consider the fixed expenses, they were 11% in 2019 due to higher revenue, but rose to 22% in June of this year because our revenues were less than half, down by 61%. This resulted in an EBITDA of only 14.8%. There's significant operating leverage at play. As revenues continue to rebound, driven by increasing leisure travel as cities reopen and more business travel as companies resume operations, we will quickly cover these fixed expenses with a strong flow-through on additional revenue. Our operating models have proven successful in these markets, allowing us to manage these properties even at lower revenue levels, ultimately achieving higher margins as revenues recover.

Great. And then just one other question I wanted to ask about, especially given some of the investments that have been made, are you tracking any sense of sort of either RPI or your ADR share in some of these markets? And how much of these rate gains that we're seeing are the markets that you're in versus how much are you guys taking share and some of the payback on the ROI side?

Yes, we do track it. I can't provide specific numbers right now, but I can follow up with you later for more details. There's definitely a portion connected to the market recovery, as I mentioned earlier, and a significant part linked to our share gain from the enhancements and repositioning of our properties. For example, at L'Auberge, the market isn't experiencing a $250 increase in rates, but rather something around $50 to $75. In Mission Bay, while most of our competitors have slightly increased their rates, we've seen a much larger rate increase at both Paradise Point and Mission Bay Resort. I don't have the exact figures on hand, but rate share gains can range from 10 to 50 points, and I believe we're likely seeing an increase of $25 to $50 in Naples, if I remember correctly.

And Shaun, just to reiterate, these are projects. We completed around 23 projects from 2018 through 2021 this year, totaling over $330 million in invested capital. This is quite extensive, involving numerous hotels rather than just a few resorts. With 23 projects, that's a significant number of properties, which is why we're beginning to see the advantages of those investment programs.

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

Jon, we've gotten accustomed to looking at data every day, travel and activities and things like that. And you all started your commentary talking about the sequential improvement month-to-month all the way through July. But every year has a certain rhythm to it from a travel perspective. And I'm just wondering what we should be expecting from a sequential change. It seems like July might be the peak and then we go down. And in this case, are we going to go sequentially lower through the end of the year? Or how do you see that playing out?

Yes. I think we will likely see a decrease in August and September compared to July, which will be the strongest month of the quarter. However, I believe there will be substantial growth in October. Many companies are returning to the office around Labor Day, and there has been a gradual return over the summer for various businesses. While some major companies may return after Labor Day, the Jewish holidays occur in the first half of September, and Labor Day is late this year. This could provide a boost in leisure travel in early September that we might not typically expect. I anticipate business travel will start to recover in the latter half of September. With no Jewish holidays in October, I expect it to be a very robust month for business recovery. This aligns with our observations regarding group and advanced bookings, assuming they hold steady through mid-December. Therefore, we foresee continued improvement from October onward, with a significant increase in January year-over-year, and possibly a sequential increase compared to January and February of 2019.

That's good insight, Jon. For the second question, I noticed you didn't mention much about Chicago or Washington, D.C. Specifically, what are your thoughts on your presence in Chicago, and is there a chance you might consider exiting one or both of the hotels there? Also, regarding Washington, D.C., how significant are school groups to the overall occupancy levels in the market, and are there any indications that school groups are beginning to book for the upcoming fall period?

Sure. Regarding Chicago, our perspective has been that prior to the pandemic, we expressed a desire to exit the market, which we were not able to achieve. Currently, the outlook for Chicago remains quite negative. Next year is expected to be a strong convention year, provided that events proceed as scheduled. Therefore, this may not be the ideal time to sell in Chicago; it could actually be a good time to consider buying on a cyclical basis. However, we would likely hold off unless approached with an appealing offer from someone who has more confidence in the market than the prevailing sentiment. As for Washington, D.C., the market heavily relies on the federal government returning to the office, which has not yet happened. During the summer, the situation is also tied to the reopening of the Smithsonian and museums. Some museums have reopened, but attendance is limited. Many potential visitors have reported difficulties finding tickets for Smithsonian visits, though the remaining museums are set to open at the end of the month, which we hope will eliminate time constraints and ticket requirements. This should aid in the leisure recovery. Unfortunately, the market was slow to announce these reopenings, leading people to make alternate plans. We are optimistic that the fall will see the federal government returning, along with group and business travel. While school groups may contribute to occupancy, they often prefer to stay in the suburbs due to cost considerations. If they do decide to visit in the fall, it could help boost the city’s occupancy rates, as their preference is usually to stay downtown. Ultimately, we need the government back and the associations and business groups returning for in-person lobbying and engagement with the market.

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

And similar to Rich, I was very familiar with Jekyll Island, went there in sixth grade on a field trip. So it was a nice island, a lot of nature, good view there I thought.

Thank you.

Just a question on your leisure mix. So given the resort acquisitions, given kind of the strong pricing for leisure and urban markets, given you social groups, on a normalized basis, do you think the majority of your room revenue comes from leisure now or is it still that 60% business is on a stabilized basis?

I believe that by replacing the properties in San Francisco and New York with Jekyll and eventually Margaritaville, the leisure segment will see some improvement. We might increase our leisure revenue share by one or two percentage points from the current approximate 40%. Neither of the previous properties generated significant corporate transient business. Margaritaville, however, attracts many business groups, especially during peak meeting seasons, and we see potential for further growth in that area, especially since it can be quite profitable in terms of food and beverage sales. So, I do expect a slight increase. It's worth noting that San Francisco and New York were also strong leisure markets, but they don't match the level of the two resorts.

Got it. And do you think about your portfolio that way? Are you trying to drive your total leisure room revenue mix up? Or is it more just an opportunistic property-by-property now?

You're right. It really is more opportunistic, Anthony, and I don't think we have taken a position on we want to be more heavily leisure or we want to be more heavily in the Southeast or we want to be more in resorts per se. It's really not the way we approach it. It really is about buying assets that will have a more attractive risk-adjusted returns and properties where we can enhance those returns through our expertise. So definitely not a strategic approach from that perspective.

Got it. And maybe one more on labor. I think you mentioned a lot of your managers were pulling double duty and doing duties that hourly employees used to accomplish. Is that something that can be permanently instituted, maybe pay a manager on a salary a bit more than use managers to kind of keep headcount lower at some of your urban properties?

I believe we won't be able to maintain this level of operation. However, when we consider how we managed these properties during periods of low occupancy, there are certain times throughout the week, month, or year that tend to be slower. The current operating models reflect that managers, especially middle managers, will take on shifts alongside their usual responsibilities rather than solely focusing on their specific roles. I think this change is here to stay, promoting ongoing efficiency at the property level, which will ultimately enhance our margins as we recover.

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

Just following up on the acquisition strategy. You reduced your exposure to San Francisco. And I guess in an ideal world post-COVID, would you look for more balance across portfolio where you maybe wouldn't have 15%, 20% exposure to any given market? And then just given the pace of recovery, do you think it's tougher from here to acquire resort assets at prices that would work? And maybe we hit a lull on some more non-leisure-oriented properties or gross market?

Yes. I believe that as we focus on specific markets, we are likely to see more diversification in the coming years as we target 35 cities and continue our efforts with drive-to resorts. It shouldn't come as a surprise if we achieve greater diversification. However, we do not have a strategy that dictates limiting our market share to a certain percentage like 10%, 15%, or 5%. In the past, I learned that it’s important to be where the best risk-adjusted returns are, and a wise Board member once noted that diversification can sometimes lead to worsification. Therefore, that’s not our current strategy. Regarding resort pricing, historically whenever we made acquisitions, particularly during the 2010 to 2015 period, people often claimed we overpaid, but I don't believe that was true. The values have consistently increased, and our capability to enhance performance has also contributed to driving values up, not solely relying on market recovery. We will continue to seek properties that present unique opportunities where we can leverage our expertise, which others might overlook or where we are willing to put in significantly more effort. That is our approach. If we cannot find suitable opportunities, then we will simply wait. However, I don’t believe we are at a point where we can claim that the market's valuations have reached a level that excludes potential resort acquisitions.

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

Jon and Ray, I wanted to follow up on your earlier comments about NAV and the possibility that it may be increasing. The recent resort trades in your markets suggest a much higher value for your assets as well. You previously published quarterly NAVs, and I assume you are still sharing those with your Board. Can you provide any additional insight? Also, regarding your convertible issued at the beginning of this year, you paid $38 million to raise the strike price to the low $30 range. Do you believe that value has increased?

Yes, there is no doubt regarding our internal numbers. We have not published them because there weren't sufficient transactions in the market to validate our asset valuations. These valuations should be based on actual transactions, and we haven't seen many until recently. As we gain more confidence throughout the year, we hope to provide an updated NAV. The values have increased significantly, not only for the resorts but also for prime properties in strong markets, such as The Nines in Portland, the Argonaut in Fisherman's Wharf, and the Mondrian in L.A. In fact, most of L.A. seems to have returned to 2019 values or is within approximately 5% of them. In downtown San Diego, values are likely back to pre-pandemic levels in markets that recovered sooner. There is a growing confidence and commitment in the buying community, which has noticeably increased over the last 90 to 120 days, along with our perspectives on the pace of recovery. Underwriting assumptions from buyers have advanced by a year or more compared to just 90 to 120 days ago.

If I understand correctly, it seems you feel more confident about values today compared to before. Should we anticipate that, even though earnings numbers may still fluctuate due to the short-term nature of your rents, you are now more open to discussing values? Additionally, will you provide your NAV estimate before offering guidance?

I would think we would, yes. I would think we would, Floris.

Thank you. Our next question is coming from Stephen Grambling of Goldman Sachs. Please go ahead.

Recognizing your strategy is for value-add properties versus specific locations, what's your perspective on a distributed or decentralized workforce going forward and its impact on lodging? And is that part of the lens you're looking at in redefining the markets where you are kind of targeting?

Yes. So a really good question. I think that when you think about both a more distributed workforce and a more flexible workforce, I think that leads to more travel. It leads to more business travel, where you're not in the headquarters anymore or you're maybe not even in a regional location. And you'll have to travel to one more often than you were when you were in that location, certainly. And it's interesting, we've seen reports, talked to some companies. At the extreme, Stephen, there are some companies who said we're not even going to have office space; everybody is going to work from home. But now they're meeting quarterly and having planning meetings and bonding and trust-building off-sites almost similar to incentive trips or strategic planning meetings that you do once a year. Now they're doing them much more often quarterly, some monthly, because they don't otherwise get together. So we think there's a lot of reasons why it actually increases travel. Certainly, people who are working from home can work from anywhere, right? Technology today allows you to do the same thing at a hotel or a resort, in another location as it does from your home. And so we do think people have coined the word leisure, which I hate. I'm thinking about leisureness or a bleisure, which sounds a little better pronunciation, I think, and maybe more romantic. But I do think all of these changes allow in this evolution of travel that we will continue to experience, it leads to more travel, not less.

That makes sense. And then as an unrelated follow-up, do you have a sense for what the contribution to the strong leisure trends could be from international travel refocused in the U.S.?

It's an interesting situation because historically, and especially now that we're not in New York, our segmentation has been about 10% to 12% pre-pandemic. The downside is that we've lost some business, but there are more people in the United States who aren't traveling abroad. When both of these factors are at their extremes, they balance each other out. This will impact various markets in different ways. For instance, we’re not seeing much international wholesale business in Florida during the summer, but we are experiencing a significant increase in local and regional drive-to business compared to what we usually see. It's complex, and I can't say we have a definitive solution. However, as long as travel restrictions ease both for people going abroad and for those coming here, I believe most of it will balance out.

That's super helpful. And one quick comment for you all after two weeks of business travel around the country. But if you can figure out the taxi and Uber nightmare, that would be a home run.

Yes. Yes. Well, my recommendation is run a U-Haul truck. Evidently, that's very popular in Hawaii these days for mode of transportation. Donna, we have more questions?

Our last question today is coming from Chris Darling of Green Street. Please go ahead.

I want to go back to the Jekyll Island and Margaritaville acquisitions just for a minute. Given the location of those properties, I'm curious how you think about the risk of rising sea levels over time and then the extent to which that risk is kind of baked into your underwriting.

In both cases, the beaches are quite large, and the properties are situated far from the water's edge. As we consider this issue, our focus has been on identifying properties that, if affected, will be impacted much later and will also offer better protection against rising sea levels. This applies to both properties, including the beachfront property at Jekyll. Interestingly, at the Citi CEO Conference held at The Diplomat, you can see that the beach there is very small. This raises concerns about that property and its ability to maintain the beach due to its limited size. In contrast, at Margaritaville on Hollywood Beach, the water is situated quite a distance from the boardwalk and the property. This is the perspective we are using to evaluate potential acquisitions.

Yes. Chris, when we consider the various factors related to climate change, it encompasses more than just beaches; it includes the frequency of storms as well. We are assessing the age of the buildings and the types of windows they have, which makes the review quite thorough. The impact of rising tides on beaches may take time, but storms could occur annually. Each region has its advantages and disadvantages. For instance, the Southeast is at risk from hurricanes and rising sea levels, while the West Coast faces threats from fires and earthquakes, and Texas is now experiencing ice storms. Each area has its unique challenges.

So we have to look at that, and we have to look at how climate change does factor in, and that's something we discuss in our underwriting process, and we also discussed at the Board level. So it is something that's a real factor in operating in hotels and investing in hotels.

At this time, I'd like to turn the floor back over to Mr. Bortz for closing comments.

A long call. Hopefully, everyone appreciates the time. And thanks for those of you who've hung on to this point, and we look forward to updating you again on a monthly basis with our written updates and then quarterly again as we move into the third quarter in late October. Have a great rest of your summer. Thank you.

Thank you.

Thank you. Ladies and gentlemen, this concludes today's event. We thank you for your interest in Pebblebrook, and enjoy the rest of your day.