Pebblebrook Hotel Trust Q3 FY2021 Earnings Call

Greetings, and welcome to the Pebblebrook Hotel Trust Third Quarter Earnings Conference Call. 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.

Well, thank you, Donna, and good morning, everyone. Welcome to our third 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 our SEC filings. Future results could differ materially from those implied by our comments. The forward-looking statements that we make are effective only for today, October 29, 2021, and we undertake no duty to update them later. We'll discuss non-GAAP financial measures during today's call. We provide reconciliations of these non-GAAP financial measures on our website at pebblebrookhotels.com. Okay. So on to the highlights of the third quarter. The third quarter marked another important milestone in our recovery from the pandemic. We generated $21.4 million of adjusted funds from operations, which was the first quarter since the pandemic that we produced a positive FFO and represents considerable progress from Q2 when we had negative FFO of $15.6 million, in Q1 with negative $55.7 million. Third quarter hotel and adjusted EBITDA climbed robustly from the second quarter as well and were driven by significant increases in same-property RevPAR and same-property total revenues while at the same time, costs were well controlled. Same-property hotel EBITDA rose by 136% to $66.6 million from Q2's $28.3 million. The sequential growth was driven by robust leisure travel, improving group and transient business travel and an ability to push pricing higher, particularly at our resort properties. Same-property room revenues rose a substantial 51% from the second quarter and same-property ADR rose 10% from Q2, and for the first time exceeded the comparable quarter in 2019, in this case, by 3.8%. Same-property total revenues also rose an impressive 47.2% from the second quarter with healthy food and beverage and other ancillary spend growing faster than occupancy. Total group room nights ADR and revenues also grew from Q2 to Q3 with room nights and revenues more than doubling, which is a very favorable sign for the return of corporate group demand. The third quarter started strong to RevPAR improved to down just 31% compared with July 2019, clearly better than June's minus 51.6% comparison to 2019. Lease demand throughout our portfolio at our resorts and urban hotels increased significantly from June. It was robust and generally not price sensitive. The strength in demand continues through mid-August until surge in COVID cases from the Delta variant cause a pause in the recovery. From mid-August through mid-September, we experienced a rise in cancellations and near-term business travel, primarily group for August, September and October and softer near-term booking demand as well, as well as higher attrition when many corporate groups who did hold our meetings over this period. As a result of the seasonal slowdown in leisure travel and business demand that did not pick up the slack, same-property RevPAR weakened compared to 2019 for August, which was down 39.4% and also then September, which is also down 43.4%. September was also negatively impacted by the Jewish holidays, which both fell in the first half of September. Fortunately, as the trend of new COVID cases began declining in mid-September and have been falling for six weeks now, booking trends began to reaccelerate in mid-September and this improving trend has continued into October. Both transient and group business demand have picked up with volumes exceeding levels earlier in the year before the Delta variant and associated restrictions were imposed. Corporate transient is returning led by small- and medium-sized businesses as well as larger companies, including those in banking, consulting, life sciences, medical, entertainment and music segments, among others. Big Tech has also begun to travel but remains slower and it's recovered. For us, the most significant improvements in business demand have been in Boston, Los Angeles, Philadelphia and San Diego. Slower to recover markets continue to be San Francisco, Washington DC, and Chicago, which seems to be three to four months behind the faster recovering cities. Leisure demand remains healthy heading into the fall and upcoming holiday season, which should be very good, and our positive expectations are consistent with the strong advanced holiday demand the airlines are reporting. However, we do expect a normal seasonal slowdown in business travel levels in late November and December. Because of these improving trends and business travel demand, in particular, October is performing better than September. We're now forecasting RevPAR to be down between 37% and 38% to October 2019, and October occupancy for our portfolio should hit or come very close to the occupancy level achieved in July. This is not something we would have expected a month ago, which really demonstrates how quickly demand trends can reaccelerate and improve when health concerns related to the pandemic decline were moderate. Considering how strong October is traditionally for business travel, we find this performance a strong indicator of the reacceleration in the travel recovery, especially for business travel. For the fourth quarter, we expect same-property RevPAR and total revenue to be down between 38% and 42% compared with the comparable period in 2019. Now back to our third quarter performance. Same-property revenues of $239.2 million were up 36.3% versus the same period in 2019. This is a significant improvement from the second quarter when same-property revenues were down 57.8% versus 2019 and continue the progress from the first quarter, which was 74.7% below Q1 2019. Our strongest performance came from our resorts. For our original eight resorts and Jekyll Island Club Resort for August and September revenues exceeded Q3 2019 by 9.8%, driven by a whopping 57.1% ADR premium to Q3 2019, which was more than offset occupancy that was down just 22.5%. Our resort occupancies would have been higher but for the rooms renovation at Southernmost Resort and the exterior work on the Gulf Tower building at LaPlaya. At our urban hotels, same-property revenues were up 50.1% to Q3 2019, driven by same property revenue declines of 50.4%. This illustrates convincing improvement at our urban hotels in the quarter compared with the second quarter when same-property revenues were down 68.6% from Q2 2019 and same-property RevPAR was down 69.7%. ADR at our urban hotels also improved quarter-to-quarter from last quarter's minus 26.1% compared to Q3 2019, down just 10.8% in the third quarter of 2019. Drawing down further on our hotel operating results, our same-property resorts generated $34.6 million of EBITDA, up 45.4% versus 2019. Our hotel EBITDA margins were 41.5% compared with 31.4% in Q3 2019, over 1,000 basis points better. While some of this is a result of some continuing unfilled position, much of it is due to the significant benefit of a 57.1% or $156 rate premium in ADR to 2019 as well as higher prices for non-room revenues and our new operating models at all of our properties, including our resorts. Our urban hotels generated $29.9 million of EBITDA in Q3, down 7.2% versus Q3 2019. This is substantially better in Q2 when our same-property EBITDA was just $2.7 million. Operating expenses at the hotel level were well controlled. And in addition to the room rate improvements versus last year, we took price increases throughout all non-room revenue items. Same-property hotel expenses were down in Q3 by 29.5%, representing 81% of the 36% rate of total same-property revenue declines. Excluding fixed costs, hotel expenses were down by 32.7% or 90% of the rate of decline in same-property revenues. While we continue to have many unfilled positions at our hotels, we made very significant progress in the quarter filling open positions and the cost savings to 2019 represent a superb effort by our property and asset management teams working together to follow-up on our new property operating models that are delivering significant efficiencies and productivity gains. At the corporate level, after corporate G&A, we generated $55.3 million of adjusted EBITDA in the third quarter. This is a significant increase from the $17.1 million of adjusted EBITDA in Q2 and a negative $25 million of adjusted EBITDA for Q1. Shifting to our capital improvement program. Earlier this week, we completed a $15 million comprehensive guestroom renovation of our Southernmost Beach Resort in Key West. The last of our resorts will be fully renovated or redeveloped and repositioned. And we continue to make progress with our $25 million transformation of Hotel Vitality to One hotel in San Francisco. We've experienced some delays due to constraints of the supply chain in receiving FF&E items. So we now expect this renovation to be completed in the first quarter compared to last quarter's expectation at the end of 2021. For all of 2021, we anticipate reinvesting a total of $80 million to $90 million in the portfolio, which is in line with our prior annual estimate. Moving to our investment activities. We continue to be active reallocating capital in the portfolio. On September 9th, we sold Ville Floor in San Francisco Union Square for $87.5 million. Since Q1 2020, we have sold seven assets generating $664 million of proceeds. On September 23rd, we completed the acquisition of the 369 room Margaritaville Beach Resort for $270 million. And just last week, we purchased the 19-room Avalon, and the 12 room Gardens in Key West for a combined $20 million. We will be incorporating these two properties into the overall operations of our Southernmost Beach Resort, and we expect significant operating synergies as a result. By providing guests of these two guest houses with access to the higher service levels and amenities of the existing B&Bs at Southernmost and our overall resort, we expect to be able to drive rates dramatically higher than the prior owner. As a result, we anticipate generating an 8% to 12% cash and cash return on this investment after a 4% capital reserve on a forward 12-month basis. We'll obviously narrow this range down as we get deeper into the operations of these properties as part of Southernmost. As a reminder, year-to-date, we have acquired two resorts as well as two Bed & Breakfast guest houses for a combined $384 million of proceeds. Turning to our balance sheet and liquidity, we have approximately $807 million of liquidity after completing our recent property transactions including roughly $163 million of cash on hand and $644 million available on our unsecured credit facility. We also currently have approximately $210 million of reinvestment proceeds available under our current bank arrangements. We're proud of the tremendous progress we made fortifying 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 would now like to turn the call over to Jon. Jon?

Thanks, Ray, and good morning, everyone. I wanted to share some insights into our current business situation, our outlook for the remainder of the year, our expectations for 2022, and provide a more detailed look at the performance of some of our existing properties and markets. I'll also touch on the capital reallocation decisions we've made over the past 18 months. As Ray mentioned, we are optimistic about the recent acceleration in recovery, especially in business travel and group demand. While leisure demand began recovering earlier and is now strong, we know that returning to our 2019 performance levels depends on business travel improving further. As we noted last quarter, we anticipate reaching 2019 EBITDA levels before recovering to 2019 RevPAR, and we expect to consistently match or exceed 2019 ADR levels before we reach 2019 RevPAR. We're pleased with the rate performances across both the industry and our portfolio, helped by our focus on drive-to resorts. As Ray stated, we're achieving significantly higher ADRs at our resorts compared to 2019. This increase in rates can be attributed in part to fewer competitive options, such as cruises and international travel, as well as consumer willingness to upgrade to better accommodations. Additionally, about a third of the rate hike results from the extensive redevelopment projects we've completed in the last couple of years that have enhanced the quality of our resorts, leading to higher ADRs and beneficial returns from our investments. We believe many of these elevated rates will be sustainable, with most lasting at least two to three years, although some may prove to be temporary. In the third quarter, we estimate an increase of over $50 in ADR share against competitive market properties, with this figure significantly rising from the second quarter. While some of the rate advantage at our resorts that had historically hosted many groups will likely diminish as those groups return, the associated revenues from food and beverage and other profitable sources should more than compensate for any cuts in rate premiums. In Q3, our resorts generated total revenues that were 9.8% higher than in Q3 2019, even without the group demand; room revenues rose by 21.9%, and EBITDA was up 45.4% or $10.8 million. With rates up an impressive 57.1% and occupancy down by 22.5%, EBITDA margin reached 41.5% for our original eight resorts and Jekyll Island Club Resort, which was included for August and September. This marks an increase of 1,018 basis points from Q3 2019. On a per-key basis, EBITDA for our resorts in Q3 reached $17,000. On a run rate basis, including Jekyll and Margaritaville Hollywood Beach Resort for the entire quarter, same-property EBITDA for the 10 resorts climbed to $40.5 million, which is $13.9 million higher than Q3 2019. For all of 2021, we now forecast our eight original resorts will generate $2.5 million more in EBITDA than they did in 2019, despite being $8 million lower in Q1 this year. Including Jekyll Island and Margaritaville, expected to finish 2021 above 2019 levels, we project our total run rate resort EBITDA to be $6 million to $7 million higher than in 2019, reaching between $115 million and $116 million, equating to about $46,700 per key. Despite the 10 resort portfolio being $10.8 million lower in Q1 compared to 2019, this contrasts with $86.7 million for the original eight resorts in 2019. Notably, these figures do not incorporate the two bed-and-breakfast establishments we recently acquired in Key West. Both Jekyll and Margaritaville are performing considerably better than our initial forecasts when we considered purchasing them, with Jekyll exceeding expectations by over $2 million and Margaritaville by over $5 million. At these projections, Jekyll would have a 7.4% cap rate on 2021 NOI, and Margaritaville would have a 6.25% cap rate on 2021 NOI. Both properties are expected to perform considerably better in Q1 2022, based on current business bookings and rates. Additionally, we observed a notable rebound in performance in Q3 at our urban hotels, with occupancy, rates, and RevPAR all substantially improving compared to Q2. While some of this growth can be credited to a rise in leisure travel, particularly in urban markets like San Diego, Los Angeles, and Boston, much of it reflects the gradual recovery in business travel, both group and transient. In Q2, group room nights only accounted for 13% of comparable 2019 levels in our portfolio, but this grew to 34% in Q3. Based on current bookings and trends in cancellations and attrition, we anticipate exceeding 40% by Q4. For Q1 2022, group room nights on the books stand at 62% of the same timeframe in 2019, with ADRs currently 14% higher. For the year, group revenue forecasts for 2022 show rates at 69% of the same period in 2019, with ADR up by 6%. However, the actual figures will depend on how the virus situation evolves. We're optimistic about 2022, especially with the strong rate forecasts. While I highlighted the performances of both Jekyll Island and Margaritaville, I'd like to provide further detail. Both resorts had outstanding Q3 results. We influenced Jekyll Island's performance due to our acquisition on July 22, but Margaritaville's performance is purely based on the timing of our purchase in late September. In Q3, Jekyll Island saw RevPAR rise by 35% compared to Q3 2019, with ADR up by 23% or $58. Margaritaville experienced a 47% increase in Q3 RevPAR against 2019, with ADR soaring by 60% or $136. Margaritaville's Q3 EBITDA rose 131% compared to Q3 2019, climbing from $2.1 million to $4.8 million, while its EBITDA margin improved by 1,300 basis points. Jekyll Island's EBITDA for Q3 was up 125% over Q3 2019, reaching $2.5 million versus $1.1 million, also with a margin increase of 1,300 basis points. These are remarkable figures, and we anticipate even better outcomes as we implement operational changes over the next year, even before any planned capital improvements. We are confident that both acquisitions will prove valuable investments for the long run and will positively impact our EBITDA and cash flow in the near to mid-term. We have exchanged properties in slower recovery markets for those in faster recovery markets, which have significant potential for both operational improvements and capital investments. Since the pandemic began, we've sold two older properties in San Francisco and one in New York City, as well as rooftop antennas and historic Union Station Nashville, totaling $333 million. In turn, we've acquired two resorts in the Southeast and two small B&Bs in Key West for a total of $384 million. We're excited about these transactions and the potential upside they represent. These trades have not only reduced our urban concentration but also increased our resort concentration by trading properties in San Francisco, New York, and Nashville for those in Hollywood, Florida, Key West, and Georgia's Golden Isles. While it may seem we're focused on boosting our resort presence, we remain adaptable investors, using risk-adjusted return assessments and underwriting to guide our sales and acquisitions. Other buyers' valuations and willingness to pay influence our acquisitions since value is essential in our risk-adjusted return investment strategy. In line with this, we have recently evaluated the current values of our existing hotels and overall portfolio. The value ranges we have determined for each hotel are based on the transaction market for similar properties in comparable conditions, opportunities, and locations. With the recent uptick in transactions over the last few months, we feel there is sufficient real market data to establish actual tradable market values. While these values might fluctuate significantly and rapidly in the next few years, we are confident in publishing our overall gross and net asset values for our portfolio. These figures were included in the updated investment presentation we submitted yesterday. Our current net asset value is estimated to be between $30 per share at the low end and $35 per share at the high end, with a midpoint of $32.50. We're open to discussing this in greater detail during the Q&A or in separate conversations in the coming weeks. I also want to address the current labor situation and provide an update on our assessment of ongoing margin opportunities within our portfolio due to new operating models we are implementing. Over the past six to eight weeks, we have seen noticeable improvement in the labor situation across our portfolio. As expected, with children returning to school, more vaccinations, improved childcare availability, and the expiration of enhanced federal unemployment benefits, we have welcomed back many former hotel associates. Additionally, our property teams have found more qualified candidates ready and willing to occupy open positions. Consequently, our properties have made notable strides in hiring for critical roles, and many are now in a good position with active pipelines for ongoing recruitment. Furthermore, the H2B visa program is operational again, and we expect a significant influx of qualified H2B workers to assist our seasonal properties, such as LaPlaya, as well as Jekyll Island, where we will be utilizing this program for the first time starting later this year or early next year. We also anticipate that the labor pressures we currently face will ease over time as more workers re-enter the labor market and as virus-related cases decline. In general, we have not needed to raise wages significantly, but we have made some adjustments at our resorts in markets where we needed to maintain a competitive edge or where we've elevated our properties through renovations and redevelopments. We aim to attract the best talent to deliver exceptional service that matches our higher rates. Fortunately, our properties are typically positioned at the higher end of their markets, allowing us to not only pay more as needed but also more easily attract high-quality talent due to the caliber of our properties and the potential for employees to earn higher tips and gratuities. As you know, we've been grappling with increasing supply chain disruptions, which include rising costs for commodities like food and beverages, as well as some operational supplies and services. We've effectively implemented significant price increases across our portfolio for various offerings, such as food and beverage options both in our outlets and through banquets and catering, as well as for parking, event venues, audiovisual services, resort and urban amenity fees, spa treatments, club dues, and other recreational offerings. These increases have ranged from 5% at the lower end to as much as 25% at the high end, with an average increase of around 15% across the portfolio. We have encountered minimal pushback on these price hikes thus far, with both leisure and business customers appearing financially stable, having ample discretionary income and profits. Considering the rising prices across various goods and services, our customers have accepted these increases. This pricing flexibility and customer acceptance should allow us to continue growing our pre-pandemic margins by 100 to 200 basis points, aided by the operating models we developed during the pandemic, which include more cross-training, improved labor scheduling tools, and enhanced technology, among other initiatives aimed at increasing productivity and making our business more efficient and profitable. Additionally, Curator has completed over 60 preferred vendor partnerships with select individual product and service providers in our industry, and as we expand these partnerships across our portfolio, we expect to further reduce our overall operating costs by taking advantage of the economies of scale achieved through Curator. We anticipate this number of partnerships will exceed 80 before the year ends, providing further savings opportunities. As we approach 2022, we're strategically positioning ourselves for a strong recovery year overall. We expect group demand to be robust, given the pent-up demand, and leisure travel should remain strong as consumers seek vacations and getaways, although international travel may still be somewhat restricted. We are also optimistic about the upcoming decision to reopen our country to international travelers, believing there is considerable pent-up inbound demand that will benefit both our resorts and urban properties. Reports from airlines regarding ticket sales to international inbound travelers are also encouraging. Taken together, this leads us to believe there won't be significant rate discounting in 2022, provided we return to relatively normal conditions by year's end and maintain them into next year. Regarding the few remaining redevelopment projects we postponed due to the pandemic, we are progressing with plans and permits and expect to move forward on these projects once we have completed the necessary approvals and it is the right season to start. All of our redevelopment and transformation efforts, including the substantial number completed in recent years, plus current and upcoming projects, will yield significant benefits for our portfolio as the recovery continues. We're already seeing the positive impacts at our repositioned resorts, where demand in many cases has already bounced back. Importantly, most of the funding for these projects has already been invested, and while most benefits have yet to materialize, we anticipate they will as demand recovers. Lastly, our acquisitions to date have highlighted our competitive advantages in pursuing new investment opportunities as they arise, which include our ability to operate more efficiently than most buyers, cost savings from economies of scale through Curator, our expertise in redevelopments and transformations, our strong relationships with operators, and our well-regarded reputation in the industry. We look forward to more opportunities ahead. Now, we would like to transition to the Q&A portion of our call. Donna, you can now take over.

Thank you. The floor is now open for questions. Our first question is coming from Dori Kesten of Wells Fargo. Please go ahead.

Thanks, good morning everyone. I appreciate the top line guidance for Q4, but I'm just trying to think through how incremental labor will hit the bottom line. So can you put the margin shift from July to September that you saw into some historic context? And I believe in 2019, margins contracted about 600 basis points Q3 to Q4.

Sure. There are many challenging assumptions to consider. We have a good understanding of our situation in October, and we're looking at November and December to see how demand unfolds. Historically, as we approach the holiday season after mid-November, business typically slows down and continues to decline until the end of the year. This year, we expect a similar trend, although we anticipate slightly stronger performance on the resort side. Overall, margins will be influenced by demand. We're not solely concentrating on margins; our focus is on maximizing profit per key. We expect October to perform better than September, while November's profit may resemble September's. December usually tends to be weaker than November, even with our current portfolio.

And Dory, we don't have a clear idea of the margins and the bottom line operating results, which is why we haven't provided that guidance. At this moment, we can't predict how many more people will be hired in the upcoming months as we fill open positions. You could look at the total revenue decline from month to month. During our growth phase, we were likely seeing about 50% of additional revenue contributing to the bottom line. However, during the seasonal slowdown, especially as we add staff, it's more like 75% of the decline in revenue will impact bottom line margins. That's a reasonable estimate, but it could vary by as much as a third. I'm just letting you know this and emphasizing that forecasting is challenging at this time.

Got you. And can you walk through what you're seeing being marketed for sale or up market? We've heard more city center hotels are coming to market in the near term versus the prior weighting toward more resorts.

Yes, everything is relative. The activity on the resort side has led to many more resorts coming to light, including areas we weren't previously familiar with, such as Jekyll Island in Georgia. There are now additional properties in urban areas hitting the market. However, it seems to be a slower pace of offerings, and there is likely a limited amount available. As you may know, we've sold several properties in urban markets over the past six months. The advantage of our offerings was that there were limited products in those markets, and our properties received quite favorable reviews.

Our next question is coming from Smedes Rose of Citi. Please go ahead.

Hi, good morning. I wanted to ask you two quick questions. First, are you noticing any differences in performance between your branded hotels and non-branded hotels, given that branded is a smaller segment? Also, could you provide more details on how you are observing the recovery in San Francisco and your expectations for that market over the next several quarters?

Sure. So over the course of the recovery, our recovery has been led by our independent lifestyle properties and some of our branded lifestyle properties. And not surprisingly, some of the larger branded properties like our Westins were a little slower to recover. The independent properties have a lot more appeal to the leisure guest, which has been, as we all know, the driving force behind the major part of the recovery so far. So it shouldn't be surprising at all that that, that's occurred. I think as it relates to San Francisco, it's just slower to recover. The big tech companies have been slower to return to office. We all see the micro data that's put out by some of the companies that provide security and check-in services at office buildings. And so it's definitely been slower to recover in that market. The good news is it has been recovering the case loads in San Francisco are the lowest in the country, frankly. And so we do expect particularly with international travel opening up again to see both some leisure and business travel recovery pick up. But San Francisco like Chicago and DC have struggled without conventions, major conventions in the market and without the major part of the corporate recovery in the case of San Francisco and Chicago and in DC, the federal government, which hasn't come back to their offices yet.

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

Hey good morning guys. Thanks for all the detail in the prepared comments. I want to drill down on the NAV analysis for a minute here. So maybe just give us a sense of like, obviously, EBITDA at the resorts is surpassing 2019 levels. It looks like the NAV here is geared toward 2019 actuals across the board. So what's the chance? What's the probability, let's say, that some of your urban markets are sort of non-resort hotels don't get back to that level of performance for the foreseeable future. And then secondly, does it even matter? Are buyers underwriting that either way, whether we believe it or not? And then on the cap rate side, with depressed income levels, obviously, cap rates don't mean a whole lot going in, but is there sort of an IRR target that these would suggest buyers are underwriting to over a longer period of time? Thanks.

I'm glad you asked this question because it really gets to the core of how we determine these values. These values are based on actual market transactions, not theoretical calculations using cap rates. This means we don't fully know all the factors that other buyers consider. When we evaluate purchases, we focus on future cash flows. Unlike properties with long-term leases, which typically follow cap rate methodologies, the assets we deal with require a different approach. It's genuinely about the buyer's perspective on future cash flows and their expected internal rates of return (IRRs). When making our purchases, we examine both five-year cash flows and fifth-year cash returns, along with discounts to replacement costs, which influence market risk. We also consider various risks, such as legislative, union, brand, or encumbrance issues that affect control and value, and we think other buyers are likely considering similar factors. These figures are not based on cap rates but rather on how buyers are analyzing the market. Furthermore, our resorts are performing significantly better than in 2019, despite the challenges. For instance, LaPlaya in Naples is projected to achieve 50% more EBITDA in 2021 compared to 2019 after substantial investments to improve the asset. However, different buyers may place varying emphasis on how much of that improvement is sustainable based on their perspectives of market trends. It's noteworthy that this property is excelling without the usual substantial group business. Additionally, we’ve sold around $6 million in nonrefundable beach club memberships, generating an average of $2 million to $2.5 million in net revenue that isn’t reflected in the primary figures. So, how someone values that can vary. We do our best to consider all these elements beyond just looking at 2019 figures; we assess how recovery is progressing and what buyers anticipate for the future of these markets and properties. We’re all likely to make incorrect assumptions in one way or another, making this a more intricate process where cap rates are simply a byproduct of those considerations. We compared these values to 2019 numbers only because they are the most stable points available, though we could have used 2021 resort figures to illustrate some differences. However, it was simpler to present the entire portfolio in that context.

I get it. Either way, the 30 to 35 doesn't necessarily represent a liquidation value that Pebblebrook would be comfortable with. In reality, spot and time today. I mean it's just kind of a helpful guidepost, I think, more than anything. Is that accurate?

It's a specific moment in time, and these figures have increased significantly over the past six months, as we anticipated in our internal assessments. However, we didn't feel there were enough actual transactions in the market to confidently share these numbers publicly. These figures will continue to fluctuate based on performance, the outcomes of recoveries, changes in buyer sentiment, and the availability of products in the market. Numerous variables can obviously affect values.

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

Hey good morning everyone. Jon or Ray, you did give some color throughout, but hoping you could just drill a little deeper on the mid-week occupancy improvement that you're seeing throughout the portfolio so far in October. Yes, I think you said the occupancy is already back to July type levels. It sounds encouraging. But can you give us a little bit more color on markets and industries that might be driving that and a little bit of behavior you're seeing there?

Sure. We've noticed significant improvements in various micro data. For example, as of October 24, our weekday portfolio is performing at 50.7% occupancy with an average rate of $249. In comparison, September's weekdays had an occupancy of 43.3% and a rate of $244. We're seeing ongoing enhancements in both occupancy and rates. In July, during the peak of the recovery, our weekday occupancy was just under 53% at a higher rate of $261, influenced by the much higher resort rate, which was $424 for resorts and $218 for urban properties in July. In October, urban weekdays are performing at $235, indicating progress compared to 2018. Industry-wide, we're seeing a broad recovery, with weekly reports revealing that more corporate accounts are returning, even if in smaller numbers. There's notable activity from consulting, project business, and the medical and pharmaceutical sectors. In Los Angeles, the entertainment industry is rebounding with music concerts and productions. While larger corporate accounts, especially in financial services, haven't returned in full volume, all banks in our sector are traveling again, even if they’re not back in the office yet. This separation seems to be a positive sign, suggesting that returning to office could further boost visitations and business travel.

Great. And maybe just as my follow-up, there's been some increasing delineation in the industry between small corporate and big corporate where we started to see, I think, small- and medium-sized enterprises getting back to normal a little bit faster than maybe the Fortune 500 largest kind of corporate account clients. Any way you could either break that down size-wise for your portfolio? Like do you know your exposure to maybe like larger-scale corporates versus a more mixed bag? Or for the industry, have you ever seen anything interesting there? Just sort of a high-level question because we're getting this one increasingly.

Yes. I would recommend reaching out to the brands that may have more detailed information. Regarding our business travel demand, I estimate that at least 60% to 70% of our transient business travel originates from non-corporate account channels. These bookings are made through the GDS system, OTAs, and directly on our websites, and they may or may not identify a corporate affiliation or be for business purposes. As we have mentioned, our tracking data is not very thorough. While we know that some bookings come from our corporate accounts, these accounts represent a small fraction of our total business travel. Additionally, with citywide events and conventions, it gets even more complicated since many attendees do not stay within the convention blocks and book directly with hotels. This results in those bookings being classified as transient, even though the demand is driven by group events like conventions and conferences. I wish I could provide clearer insights, but anecdotally, about 80% of our current business is likely coming from small and medium-sized business travelers, while larger corporations are taking longer to recover their pre-pandemic volume.

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

Good morning. My first question is on hourly staffing trends at your hotels. I appreciate labor models may be quite varied across the portfolio, and there may be structural reasons why you're not seeing as much wage growth. One high-level figure from the Bureau of Labor Statistics noted about a 13% year-to-date increase in hourly earnings for nonsupervisory roles in hospitality. But if I understood your commentary this morning, you're not seeing these hourly wage increases in general, perhaps excluding the resorts. So taking a narrow view, for a housekeeper, for example, roughly how much higher is an average wage today versus earlier this year in your resorts versus your corporate focused hotels, if you're willing to share?

I would share that information if I had it, but unfortunately, I don’t have the specific details. However, I can offer a broader perspective. In urban markets, we typically adhere to our union contracts, which include predetermined yearly wage increases, usually around 3% to 4%. Many of these contracts are multi-year agreements. Nonunion properties in those markets generally follow a similar pattern. Most of the increases we implemented last year were in line with this. Some properties may have been closed last year and missed those increases. So, this year, we may have seen a 6% increase earlier due to a two-year adjustment process: a 3% increase corresponding to the market changes last year, followed by another increase in July. We’re following market trends. It's important to note that in most of our urban locations, wages for our housekeepers are significantly above the minimum wage levels and increases seen from major companies like Amazon, Costco, Walmart, or Starbucks, which don’t significantly affect our urban operations. Additionally, I believe the Bureau of Labor Statistics data does not differentiate between urban and suburban or tertiary markets.

Yes. And Greg, just to add on that, the wage pressures that we're seeing and the wage challenges are more in the suburban markets and the resort markets than urban. Urban had been less of a challenge with the hourlies. Clearly, the demand is at a different level there than the resorts. It's resorts that have been and suburban markets more pressure. And that's also where folks like Amazon and Walmart are also hitting more too because that's a good job in a suburban resort market.

The challenges with wages are primarily occurring in the suburban and resort markets, particularly in places like Key West, which has historically been difficult. We've seen wage increases in the range of 5% to 10%. Additionally, some of the third-party contractors we rely on for housekeeping in the Keys have gone out of business, possibly due to tax issues. As a result, we have implemented retention bonuses for new hires, which can amount to $250 or $500 after six months. We also offer referral bonuses, which are common in the industry, but some of these have increased from $250 to $500 because the most effective hiring method for hourly positions tends to be through referrals from friends and family. Furthermore, at our properties with successful food and beverage and banquet operations, we can attract employees from other properties that do not have the same volume or pricing, as those employees tend to earn more with us. Overall, I anticipate a division between the ability to hire and compensate employees in higher-quality properties compared to lower-rated ones in these markets.

Thanks for the insights there. And I also struggle with getting to a market level perspective. I don't think BLS does it. So it's all very, very helpful. My follow-up is related to what you're just discussing. There's a bit of a consumer behavior and customer service question. While not specific to your hotels, across the service industry, one emerging theme as of late is that consumers are paying the same or more for services but the service quality is getting worse. NPR had a piece of this recently calling the concept skin inflation. Yes, I guess the ramifications for PEB in several ways. The one that comes to mind is consumers paying up for hotels where there is superior service. Now where that bifurcation that you were just talking about may be applicable. And maybe that applies to PEB where consumers pay up for your hotels. But for other hotels, whether consumers are expecting less service, maybe they are more likely to just pay less. So I'm curious if you have any opinions about this topic or I'm totally off base here.

No, I think you're correct, but I would add that it's not just about service; the quality of the product is also important. As we've discussed before, during recovery phases in cycles, our assets typically gain market share, which is happening now, especially in terms of rates. You can maintain occupancy by lowering rates to attract price-sensitive customers. We are experiencing significant rate increases, particularly at properties we have repositioned, and across the entire portfolio. We monitor metrics like our TripAdvisor rankings, which show that we have improved from pre-pandemic levels and since the start of the year. This is likely to reflect better performance, while properties that struggle to attract quality talent or maintain their facilities often find themselves in a negative cycle of losing market share, which limits their cash flow and ability to improve. Therefore, we are very attentive to the type of service we offer. We've opened restaurants in some locations where we may not be making money right now, but we believe it's crucial for attracting visitors and supporting the room rates we charge. If we could limit questions to one so we can conclude before the weekend, that would be great. We're happy to continue, but we understand some listeners might leave if we take too long. I'll also try to keep my responses more concise.

So just ask us no questions.

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

Hi guys, good morning. Two-part question, but kind of goes hand in hand there's one answer. Just could go back to risks. Just first, kind of fundamentally, what are the bigger picture risks that you're focused on as you look out over the next 12 plus months, virus aside. And then kind of part B to that is what about on the real estate side and on the transaction side in markets as you think about reallocating capital where are the risks there?

Yes, there are many risks besides just the virus, and there always have been in our industry. A major macro risk we consider, though we are not currently overly concerned, is if inflation proves to be permanent rather than temporary. If inflation becomes ingrained in expectations, it could lead to a cycle of increased responses from the Federal Reserve, resulting in a recession or a significant slowdown, possibly with a recovery period longer than what we've typically seen in the past. This is the primary risk that we focus on. Generally, we don't worry much about inflation; in fact, we believe it benefits our industry. At present, our customers are doing very well and are not sensitive to price increases, so we're implementing those increases where it makes sense. On a micro level, we are facing more typical risks that existed before the pandemic, such as quality of life in urban areas, homelessness, and safety concerns, which have intensified in some cities that previously had no such issues. With fewer people around, cities have seen increased negative behaviors, leading to more opportunities for crime. The challenges surrounding policing and community interactions have compounded the situation in some areas, creating risks that we are working to understand as we move forward. We recall situations in cities like New York, where the electorate chose leaders focused on addressing these key issues, and we are beginning to see similar movements in other cities. However, we anticipate that some recoveries may take longer since a lot of travel, including conventions, is discretionary. There are buyers concerned about union risks, avoiding union properties. We view it differently; the risk lies in the possibility of a property becoming unionized if it has not kept pace with wages and benefits. When considering acquisitions, we assess whether there is a significant risk related to wage and benefit increases required to match union standards in appropriate markets. We don't shy away from union properties; we support fair wages and full benefits within our industry. However, we must understand the historical practices of others in the properties we are looking to acquire.

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

Hey good morning. Jon, your scripted remarks are 35 minutes. So it's not fair to blame all the questions here. But I'll ask you one on San Francisco.

We would expect that to lead to fewer questions but evidently, that's a wrong premise, and that's okay. We've done 90 calls, and it's always been the same.

And Bill, was that your question?

Yes, was that?

That was the statement. Jon, we find ourselves kind of what we were pre-pandemic. If you look at Vegas, it seems to be really thriving here and you look at San Francisco what arguably the worst market in the country or one of the worst. And I'm just wondering whether we just have kind of gone back to where we were in this decline in San Francisco from a convention and meeting perspective and continues. And in the interim, we've lost a number of companies to other markets in Texas in particular. So just your thoughts on the future there and maybe how much you're willing to continue to allocate from a percentage of portfolio basis to San Francisco?

I believe that betting against San Francisco in the long term would be a mistake. The city still has strong underlying fundamentals. It’s not just about the weather, geography, or the city's appeal; it's also about the robust economic base that drives new businesses, economic growth, job creation, and office demand, all of which attract travel. This foundation remains intact. A significant contributor to this base is the universities, along with existing business clusters and the substantial venture capital flowing into the area. The biomedical and bioscience sectors are thriving in the San Francisco Bay Area, which is among the top markets in the U.S. for this growth. We are encouraged by recent government initiatives, including an additional $1 billion a year for two years directed toward homelessness, increased funding for the police force, and $300 million annually for mental health over the next two years. We see these efforts as a sign that the government is beginning to tackle the challenges. We still regard San Francisco as a strong long-term market, though it may face short-term struggles until we overcome the virus and businesses fully reopen. People are returning to San Francisco, moving back from their parents' homes, and we can observe ongoing growth. The number of companies that have gone public or been acquired in the Bay Area is substantially higher—about 70%—than the rest of the country in the last year. Therefore, we remain confident in San Francisco and are not against investing there. However, we do assess risk and return. We've sold a few assets in the city and may sell more, reallocating that capital to markets that offer better risk-return opportunities.

Thank you. Our last question today is coming from Ari Klein of BMO Capital Markets. Please go ahead.

Thanks. Maybe just following up on the NAV update. With resort NOI higher in 2021, I imagine the underlying cap rates probably haven't changed that much from where they were in 2019. I guess, first, is that a fair way to think about it? And then if that is the case, what if anything does that imply about the expected durability of the strength you're seeing there, at least in the eyes of investors? And do you think there's room for further cap rate compression?

Yes, those are all great questions, and I wish I had clearer answers because it's complicated and some aspects are uncertain. However, it's clear that resorts would likely trade at lower cap rates today compared to pre-pandemic levels, primarily due to the perception that resorts carry less risk than urban properties, at least in the short term. This is because you're buying an asset that generates cash yield, while many urban properties have smaller or no cash yield, which impacts valuations. Additionally, the investment brokerage community seems to have a generalized view about the hotel industry that likely accentuates this in resorts. Yields have decreased across all other real estate sectors, with industrial properties dropping to 4% cap rates or lower, residential properties below 4%, and healthcare on a downward trend as well. Their argument would be that cap rates are low because stabilized income is not present in many instances. This leads to forecasting forward numbers, and cap rates tend to be more applicable in categories where year-to-year changes are minimal and dictated by existing contracts or leases. This makes valuation assumptions broader and contributes to the market's intriguing nature. When we receive bids on properties, there's a wider range compared to other categories. While it's evident that resorts would trade at lower cap rates, the pertinent questions revolve around the numbers and investors' perceptions about the stability of those numbers. We anticipate that our resorts will perform significantly better next year, as indicated by the first half's results and the resurgence of group bookings at our properties that accommodate groups. We expect much higher revenue figures and, in many cases, higher average daily rates than we achieved this year, where rate growth only began to significantly rise late in the second quarter into the third quarter. I apologize for the lengthy response, but that's our perspective on the matter.

And Ari, I'll also add that we've also renovated or redeveloped several of our resorts recently. So if you're looking at where the values were in '19 and cap rates there and comparing it here there's a change. You have to take into consideration, for example, at L'Auberge Del Mar, the renovation we completed here in this recent May. Southernmost and LaPlaya, we've invested capital there. Mission Bay in San Diego, we deflagged from Hilton and made an independent invested capital there. And it's added some more treehouses and other amenities. So there's a lot of other factors going on in there, which to continue to grow the value of those properties.

We've really read on all the resorts and Southernmost was the last one. So they've all been fully renovated and redeveloped and repositioned in many cases in the last three or four years.

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

Hi, good morning. I have a question regarding the recovery of business transient. You mentioned needing to return to 2019 EBITDA levels. Has the exact percentage of recovery required changed considering the significant strength you've experienced in leisure, both in resorts and urban properties? Is the target now around 95% or 90%? Do you need to achieve a lower percentage if you maintain some of the gains in resort and urban leisure you've made this year and potentially next year?

Yes. I mean it's a good question, Anthony. And I hope our comment wasn't misinterpreted. We don't need to get back to the same exact levels we were at from a volume perspective for some of those reasons that you provided, one is the strength of the resorts; two, I think ADRs are likely to run above '19 very quickly and in many cases, below past '19 levels in even a transitory inflationary environment. Three, we've changed our models in how we operate these properties, and so we expect to get back, as we said, to bottom line EBITDA numbers before even we get back to the same revenue levels, let alone the same volume numbers. And so no doubt, the segment that will be slowest to recovery is going to be the business travel side and more likely probably a little bit more on the group side than the transient side in terms of timing. But we do think there's a lot of pent-up demand there, and it may happen a lot quicker than what people think, again, with the provider being what happens with the virus and to people begin to behave normally and with the vast majority of the population vaccinated.

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

Thank you for taking my question. My inquiry is somewhat connected to the NAV, specifically regarding the 16% of your assets that are still managed by Marriott. How does this factor into your NAV? What is the potential upside, and when can these contracts potentially shift to independent or non-Marriott management? Additionally, could you discuss whether changes like Paradise Point possibly transitioning to a Margaritaville will be reflected in your NAV? Are the curator and the Z Collection included in your NAV calculations as well? I realize this is a complex question, but I'm eager to hear your insights.

Yes. Regarding the specific Marriott contracts you mentioned, we have a few, including the Westin Michigan Avenue, which expires at the end of 2026, and the Westin Copley in Boston, which expires at the end of 2028. These contracts are older and have management fees significantly above current market rates. However, we haven't included these factors in our valuations. Additionally, we haven't factored Curator into our valuation, and you will notice there is no mention of Curator in our corporate NAV either. Future conversions or opportunities in our portfolio, such as the potential switch from Paradise Point to Margaritaville, are also excluded from our considerations. We tend to adopt a conservative approach when it comes to our NAV. Historically, the market has shown skepticism even when we sell properties within the value ranges we've provided. If the company's valuation relies more on cash flow and not NAV, that's a reasonable perspective in assessing a business's worth. However, if the management team is inclined to sell and capitalize on these values, you might think that would be more positively factored into the valuation. But I cannot comment on stock prices; I just wanted to address your inquiry about the company's valuation.

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

Hi, good morning. Jon, you touched on it on that last answer, but going back to that NAV estimate and the obvious discount there between your share price and your internal estimate of value. It does beg the question, why not look to sell assets more aggressively and try to take advantage of that disconnect. So just curious to maybe better understand how you're thinking about that.

Sure. So when we look at valuations and we look at whether we sell or buy, there's a lot of things we have to take into account the long-term strategy of the company, some of the opportunities that Floris even asked about in terms of how much opportunity is there in the individual assets to drive growth in cash flow and value. And you need to have a place to put those investment dollars many of our properties we've owned for a while or that we acquired from LaSalle, which were owned for a significant period, also have tax issues that we have to take into account within those decisions. And we also are in a business where some of these properties you might never see again in the market in terms of availability. So it's not like trading in and out of stocks. And I know that's not what you're suggesting at all. But it is harder to trade these assets versus looking at them on a long-term basis. But we have sold significantly in the past and when the disconnect has lasted, and that may very well be the case as we move forward.

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

Thank you very much, Don, and thank you to everyone for participating. While we joke about it, we truly appreciate your thoughtful questions. We look forward to providing you with updates again next year, and we will continue our monthly updates in the meantime. I hope everyone enjoys the holiday. Thank you.

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.