Pebblebrook Hotel Trust Q3 FY2022 Earnings Call

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

Thank you, Donna, and good morning everyone. Welcome to our third quarter 2022 earnings call and webcast. Joining me today are 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. Forward-looking statements that we make today are effective only today, October 28, 2022, 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. So, last night, we reported stronger than expected Q3 results, led by our urban hotels. Business travel, both transient and group, continued its recovery throughout our markets, clearly benefiting our urban properties the most. And leisure travel has returned to the cities as well. Bookings improved after Labor Day as business travelers got on the road to meet with our customers, reconnect with their coworkers, and participate in major conventions and meetings. Leisure travel in the quarter remained robust, along with very strong rate premiums over 2019. We saw solid and consistent improvement in our operating metrics throughout the quarter. Overall, we experienced encouraging trends across our portfolio throughout the quarter, which continued in October. We've not seen any signs of a slowdown in travel demand. However, given the Fed's actions, we continue to closely monitor bookings, cancellations, activity levels, corporate travel policies, and overall spending for any signs of slowdown. Q3 total revenues exceeded our outlook despite the negative impact of Hurricane Ian, which made landfall near Naples, on September 28. Given Hurricane Ian's large size, changing track in forecast, and its impact on Florida and the Georgia coast, it had some effect on all of our Southeast properties. Overall, it reduced our hotel revenues by approximately $2 million in September. Of course, the most significant impact was in Naples, with roughly half of the September revenue loss occurring at LaPlaya. Despite the impact of Hurricane Ian on our results, adjusted EBITDA was above the top end of our Q3 outlook by $1.5 million, and adjusted funds from operations, of $0.66 per share, was $0.01 above the top end of our outlook. On the revenue side, same-property RevPAR exceeded Q3 '19 by 1.3%. Q3 was the first quarter since the pandemic that we surpassed the 2019 comparable quarter's results. Both July and September same-property RevPAR total revenues and hotel EBITDA exceeded the comparable months in 2019. July benefited from solid leisure demand, and September benefited from strong business demand, which was very encouraging. ADR was 20% above Q3 '19, led by our resorts which were up 57% to Q3 '19, and our urban ADR was up 8.3%. Both of these represent an increase from their Q2 premiums of 54.4% for our resorts and 6.8% for our urban hotels. Non-room revenue per occupied room rose an even stronger 23.3% versus 2019. And total revenue per occupied room increased by 21%, maintaining the positive trends we've experienced all year. These revenue increases demonstrate our sustained ability to take room and non-room price increases across the portfolio, and our customers' willingness to accept them, thereby helping to offset operating cost increases. Q3 occupancy finished at 72.7%, which was still only 85% recovered for 2019, indicating a substantial opportunity to grow revenues further as demand continues to recover and normalize. Our resorts achieved an occupancy of 69.3%, and despite all the discussion about strong leisure, occupancy at our resorts is still only about 88% recovered to 2019. Urban occupancy, which exceeded our resort occupancy for the first time since the pandemic, finished at 73.3%, yet it is still only 83% recovered to 2019, leaving a lot of upside yet to recover. Same-property hotel EBITDA, of $130.9 million, is 96.8% recovered to Q3 '19, which marks our best quarter compared to 2019 since the pandemic. And it would have been closer to just 2% off from 2019 but for the impact of Hurricane Ian. Our hotel EBITDA margin was 32.4% versus 34.3% in 2019, so off just 192 basis points, with occupancy down about 13 occupancy points to Q3 '19, so very encouraging. And when you consider that the CPI had increased over 15% since 2019, this means that in today's dollars, if our expense growth in 2019 would have followed the increase in the CPI Index, we would have had $300 million of operating expenses in the quarter, versus the $273 million we actually incurred. So, about $27 million less in operating expenses. This underscores our success in mitigating operating cost increases in this inflationary environment through price increases, and also evidences the more efficient operating models created at our properties as a result of the pandemic. As the recovery continues in the hotel industry, we expect to generate higher profit margins. Shifting to our capital improvement program, we remain on track to invest $100 million to $110 million into the portfolio in 2022, with over $80 million of it targeted for a number of ROI redevelopment projects, which we expect will generate cash and cash returns of 10% or higher when these transformed and re-merchandized hotels and resorts stabilize over the next two to three years. Relating to LaPlaya, we want to provide you an update on the restoration and reopening of the resort following Hurricane Ian. LaPlaya, which sits directly on the Gulf of Mexico beach, was unfortunately impacted by an 8-9 foot storm surge that caused the most damage to the property. Fortunately, the Gulf Tower lobby and the restaurant start one floor up from the beach, as does the Bay Tower on the other side of the property. As a result, the most significant damage was done to the beach house building, impacting rooms and building equipment on the beach level, as well as their landscaping and hardscaping throughout the property. The buildings also suffered some water infiltration from the heavy rains and wind that was relatively minor compared to the ground floor impact. Fortunately, we were well-prepared and had a large third-party remediation crew positioned nearby who arrived with remediation equipment and a crew of 200 to start the inspections, cleanup, remediation and repairs the day after the hurricane hit. And while the Naples beach area continues to be without power, our remediation partner brought in large generators to power all the buildings, dry them out, and get their air handling systems working quickly. While LaPlaya remains closed as they begin to do repair and remediation work, we have already begun to make significant progress in the cleanup, repair, and rebuilding, even without electricity being restored to the area. We are striving to reopen parts of the resort by late November, with much of the public areas repaired and renovated. We expect to have most of the guestrooms in the Bay Tower completed and available that time with guest rooms in the Gulf Towers scheduled to open then or perhaps later in the fourth quarter. The Beach house, which as its name suggests, is right on the beach, will take more time to repair as this building received the brunt of the damage from the hurricane. Our best estimate at this time is that the Beach house building reopens sometime in the second half of next year. But, we are not really comfortable with any forecast at this point. The biggest obstacle to reopening is the long lead time for electrical and elevator equipment. The rest of the down repairs will be completed much earlier. Based on our review of the resort with our property adjustors and physical property experts, we currently estimate that the cost to remediate, repair, replace, and cleanup LaPlaya will be between $15 million and $25 million. This estimate could increase as we progress through the remediation and repair program. At LaPlaya, we expect that our business interruption insurance will cover all the losses up to the estimated $1.7 million deductible for business interruption. Beyond LaPlaya at Southernmost Beach Resort, Key West which remained open throughout the hurricane, we incurred wind- and water-related damages to the resort including a tanning pier that was destroyed. We estimated the property damage to be between $7 million and $9 million. At the Inn on Fifth and Downtown Naples, we expect to incur $1.5 million to $2.5 million of remediation and repair work. And we are already pretty far along into completion. As a result of the impact of Hurricane Ian at LaPlaya and Southernmost, we accrued a reduction in property assets of approximately $12.9 million. However, we believe we will cover this write-down through our property insurance program, except for the $7.9 million combined property and casualty deductibles at these two resorts. We have reflected this amount in our impairment and other loss items on our income statement. When we receive the business interruption proceeds from our insurance carriers, we will reflect this in our financial statement. We do not expect this will occur until sometime in 2023. Shifting now to the investment side of our business, we sold three hotels in the quarter. One is San Francisco, one in Portland, and one in Philadelphia, generating $183.9 million of sales proceeds. And year-to-date, we have sold four hotels generating $260.9 million. Turning to our balance sheet, we successfully completed a $2 billion refinancing of all our credit facilities and term loans. This has allowed us to extend our debt maturities and increase the size of our unsecured revolver for $650 million all while maintaining the same price on this debt as we had pre-pandemic. As a result of the successful refinancing, we have no meaningful debt maturities until October 2024. We also have limited exposure to rising interest rates as 79% or $1.9 billion of our debt in convertible notes has fixed interest rates, leaving about $500 million of floating rate debt. As a result, our weighted average interest cost is a low 3.2%. This floating rate debt allows us to pay down debt whenever we like without prepayment penalties. From the proceeds of our recent property sales, positive operating cash flow, and debt refinancing, we currently have approximately $120 million of cash. Our $650 million credit facility is completely undrawn providing us with tremendous liquidity and flexibility. We also paid down approximately $127 million of debt since the end of the second quarter. And on that positive note, I'd like to turn the call over to Jon. Jon?

Thanks, Ray. As Ray indicated despite the impact of Hurricane Ian, the quarter came in slightly above the top end of our outlook with the hotel operating performance at the high end of our outlook. The outperformance was driven by the continuing strong recovery in our urban markets with transient group and citywide demand improving, and leisure customers returning to the cities. This urban recovery in our portfolio was widespread and it involved all properties and markets. Every one of our urban markets except Miami achieved better RevPAR performance in the third quarter compared to 2019 versus the second quarter compared to 2019. In the third quarter, our urban RevPAR was down 10.1% versus Q3 2019. And that compares to Q2's 17.7% shortfall. Clearly, that's a significant improvement. Not surprisingly, the markets with the most extensive gains from the second quarter were most of the previously slow to recover markets including Chicago, Seattle, Washington, DC, and San Francisco. But San Diego also moved ahead strongly with a very active and successful citywide convention calendar in the third quarter. And San Francisco, as indicated, was one of the most robust recovering markets in the third quarter. Many of you joined us in San Francisco last month when we spent two days touring six of our hotels and several of our partners' hotels. We happened to be there during Dreamforce which filled the city's hotels with high-rated customers and was a very successful citywide for the city. The city looked great. It was clean with lots of people on the streets. The restaurants were overflowing. And the negative elements that have gotten so much publicity were frankly not very noticeable. The city continues to make progress in addressing its problems. The successful Dreamforce convention not only helped September's overall performance but was clear evidence that a recovery in the convention calendar will have a very favorable impact on our industry's recovery in San Francisco as we move into next year which has a much improved convention calendar compared to this year. I would also like to highlight the performance of one of our recently redeveloped and transformed properties in San Francisco because, due to a great team effort, its strong performance highlights the power and the success of our redevelopment capabilities, our efforts, and extensive program following the LaSalle acquisition. And it does so even in one of the slowest recovery markets in the U.S. I am talking about the $28 million redevelopment and transformation of Hotel Vitale into the eco-focused luxury 1 Hotel San Francisco. This extremely well-located property across from the Ferry Building along the Embarcadero reopened as the 1 on June 1st. This property represents our values and our focus and commitment to sustainability, repurposing, and reuse. And it appeals to a large base of customers with similar values. The hotel has been extremely well received by the community and customers. And in just a few months, has risen to the number four Tripadvisor traveler-ranked hotel in San Francisco, just one spot ahead of our Harbor Court Hotel a block away. Since its reopening as of 1, we have been averaging rates in the $480 to $580 range on a monthly basis. And these rates are between $130 and $165 higher than the comparable months in 2019. In September, room revenues exceeded September 2019 by over 10% even with occupancy lower by almost 12 points. We achieved total revenues that exceeded 2019 by over 18%. And EBITDA was more than 50% higher than in September 2019. Now I am not saying we are going to do this next month or every month going forward. But we do believe the rate premium we ultimately achieve on a stabilized basis will be similar or higher than what we've already been achieving. And as the market continues to recover and we ramp up, we should be able to drive at a minimum of 15% plus cash yield at stabilization on our $28 million investment that created this fantastic conversion. Similar transformational investments we have made recently in so many of our properties obtained through the LaSalle acquisition should also deliver 10% plus cash yields on our investments. These include the previous transformations of the Hilton San Diego Resort into Mission Bay Resort San Diego; the Hotel Donovan into Hotel Zena; Mason & Rook into Viceroy, Washington, DC; Grafton on Sunset into the funky Hotel Ziggy on the Sunset Strip; the dramatic upgrading of Chaminade Resort in Santa Cruz; Skamania Lodge in the Columbia River Gorge; Le Parc in West Hollywood; Viceroy Santa Monica; L'Auberge Del Mar and Southernmost resort in Key West, as well as the upcoming transformations of Hotel Solamar into Hotel Margaritaville Gaslamp quarter in San Diego; Paradise Point in Mission Bay San Diego into a Margaritaville Island Resort and dramatic transformations and upgrading of our recent acquisitions; The Jekyll Island Club Resort in the Golden Isles of Georgia, Estancia La Jolla in San Diego, and Gurney's in Newport, which has also been renamed Newport Harbor Island Resort. ADR and RevPAR share gains, as these properties grow to stabilization will add to our growth in the years ahead, regardless of the macro environment. And I'd be remiss if I didn't mention the dramatic upgrading of LaPlaya in Naples into a luxury resort that we completed before, and unfortunately, again after Hurricane Irma. LaPlaya Beach Resort & Club, which of course is currently closed due to Hurricane Ian, was on track to deliver over $35 million of EBITDA this year. This would have been a doubling of EBITDA from 2019 when we completed the upgrades post-Irma. The full-year forecast is consistent with the year-to-date improvement through September. And as a result of several positive factors, including the huge upgrades we previously made to the property, a unique and very successful beach membership club that is contained in the property where we've upgraded the experience, a great collaboration between our team and Noble House who has done a fantastic job on the ground driving this performance and the ongoing benefits of the pandemic that have led to increased pricing at many high-end resorts. I raised LaPlaya not only as an example of a very successful transformation we previously completed that has delivered a very high return on our investment but because it will be built back better after Hurricane Ian's unfortunate damage. As we look forward to the fourth quarter, which of course is well underway, the improving business travel trends we experienced in Q3 are continuing. Corporate group bookings leads and site visits remain very healthy. And at most properties, they're exceeding 2019 levels. We're closely monitoring overall business and leisure consumer behavior and have not seen any pullback in demand, future booking pace or room rates other than the normal seasonal slowdown later in the quarter. Nor have we seen any increase in cancellations or any meaningful changes in corporate travel policies. But of course, we will be monitoring these closely as we are now as the macro economy slows down. We believe that we have strong tailwinds from the continuing recovery of business, leisure and inbound international travel to more normalized levels consistent with the current levels of GDP, which of course are significantly higher than 2019 levels. We believe these strong countercyclical tailwinds, along with already low and falling levels of supply growth will help mitigate pressures from the inevitable economic slowdown that the Fed intends to deliver. Based on our recent trends, our current outlook for Q4 RevPAR is to be down 3% to flat to 2019 and up 32% to 36% to Q4 2021. The closing of LaPlaya which represents a disproportionate amount of our room revenues and EBITDA has a roughly 150 basis point negative impact in the fourth quarter to our room revenue and total revenue percentage comparisons to 2019. And it has an approximate 750 basis point negative impact to our EBITDA comparison to Q4 2019. So, our same-property outlook for Q4 assumes LaPlaya is essentially closed for the entire fourth quarter. While we're currently targeting a partial reopening in the quarter, we still expect additional expenses related to operations and cleanup will exceed any revenues achieved in the quarter by $2.5 million, though this is obviously a pretty rough guess at this point as we still haven't even had electricity restored to the Vanderbilt Beach area. So, we've removed approximately $17.1 million in hotel revenues and $10.5 million in hotel EBITDA or $0.08 per share of FFO from our Q4 outlook. So, it is impactful to the quarter. However, expect to recover this last EBITDA less our business interruption deductible from our insurance claim next year. Adjusted EBITDA for Q4 is expected to be down 30% to 38% to Q4 2019, and up 45% to 63% to Q4 2021. Splitting the impact of LaPlaya due to the hurricane, our Q4 outlook would assume same-property RevPAR of down 1.6% to up 1.3% to Q4 2019, with adjusted EBITDA of $74.3 million to $82.3 million, which is roughly in line with 2019 if you add back LaPlaya's impact. This outlook is generally in line with our previous expectations, is consistent with our Q3 performance, excluding LaPlaya, and indicates that our expectations for Q4 performance haven't changed despite heightened concerns about an economic slowdown. So, that completes our prepared remarks. We'd now like to move on to the Q&A portion of our call. Donna, you may now proceed with the Q&A.

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

Thanks. Good morning. How long do you think it may take for your Naples properties to return to stabilized operations when you consider the recovery of the entire market also?

I don't think we have an estimate on that yet unfortunately, Dori. It'll be extremely hard to forecast. We had a pretty quick recovery from Irma; back in '17, '18 was a very good year, '19 was obviously even better for that market and that property. It's interesting, if you go three blocks inland, there are not a whole lot of visible signs of an impact from Irma. And if you go downtown, which obviously is a very popular destination, where Inn on Fifth is, that the downtown looks like it did before pretty much. So, I do think the recovery will be pretty quick, that the city has already been cleaning up the beach. Their objective is to open the beach as quickly as possible. And, of course, you can't beat the weather. The last thing I would say about Naples, which is a little different than maybe some other South Florida markets, is there's a regular crew that comes every year to Naples, and a lot of them have homes down there, their families come to visit, that generates a lot of demand. And we expect them to come back pretty quickly. And in the meantime, there's a lot of demand in the market and we're seeing it downtown at Inn on Fifth from folks who need to come to the market for either business purposes or to deal with issues related to their homes that are down in the marketplace. So, it's pretty hard to forecast at this point, but I would think it would come back pretty quickly, Dori.

Okay. And have you noticed any change in the behavior of meeting planners that would make you think recession worries are weighing on them, whether it's time to sign, negotiation attempt for lower room spend?

No, we haven't seen any of that.

Thanks, Dori.

Thank you. The next question is coming from Jay Kornreich of SMBC. Please go ahead.

Hey, good morning, guys. Just curious if you can discuss your current thinking on portfolio repositioning, if strategically it still makes sense to continue selling out of the urban market and investing into leisure resorts or maybe the potential oncoming recession makes you rethink that strategy?

I don't see any change in the way we've been modifying the portfolio. Our objective has been to achieve a more balanced segmentation between business and leisure. We're quite close to that goal now, estimating a roughly equal split between leisure transient and group segments. Therefore, I don't anticipate significant changes in that focus. We aren't planning to sell resort properties because we have a long-term positive outlook on those opportunities and recognize the challenges of adding new competitive supply in the long term. In the meantime, we will likely continue to redirect capital from some urban markets to invest elsewhere.

Got it. And then, I guess maybe in a similar, more near-term aspect of that, should a recession arise over the next year, so would you expect more vulnerability on the business transient side, which is still recovering lost occupancy, or more the leisure transient side, which has been far outperforming historical standards at this point?

It really depends on the nature of the downturn. People often use the term recession interchangeably, but each one I've experienced has been different with varying impacts. Some have focused on consumers, while others have been more business-oriented. I believe this one will be unique for several reasons. Given the tight labor market, I don't foresee an employment-driven downturn. There are still many job openings, and companies are likely hoping their employees will remain loyal. Thus, I doubt we will see the same levels of layoffs that typically occur in recessions where unemployment spikes, like in the last major downturn influenced by significant financial issues. Additionally, this recession will likely affect more people at the lower end of the market compared to the higher end. Another point is that we are witnessing a significant change in consumer preferences, with a shift towards spending on experiences rather than material goods. All of this suggests that any recession or slowdown will not have the traditional cyclical impact on our industry. Whether the business sector will be more affected is uncertain since it is often the first to tighten budgets during downturns due to its financial significance. However, I am unsure if this will occur this time, considering the lack of group meetings over the past two-and-a-half years and the existing pent-up demand for gathering. It's challenging to predict, but we feel confident that the industry's response will be milder than in a typical downturn. Furthermore, we are still benefiting from strong countercyclical factors as our business recovers to more normalized levels.

Okay, thank you, that's very helpful color. Appreciate it.

Thanks, Jay.

Thanks, Jay.

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

Hey, good morning. This is Maddie on for Smedes. Can you hear me?

Yes.

Okay, great. Apologies, if this has been asked already, but I thought you took the full-year guidance range down by $10 million. Is that more of a function of reducing scope or pushing projects to next year? And then as a quick follow-up to that, what are your kinds of initial thoughts on what next year could look like specifically about the Newport asset?

The capital situation is primarily a timing issue rather than a change in scope. We cannot predict when investments will take place, as there are long lead times for certain equipment and replacements. If our investment ends up being lower than our projected range, it will likely be capital that we will allocate in the first quarter of next year. Regarding Newport, we have changed the name to Newport Harbor Island Resort, which reflects its location and uniqueness as the only resort in the area. Our focus this year is on planning. We are working on a comprehensive plan to invest deferred capital into the property and address necessary repairs. We aim to reposition the property to offer a higher level of experience to customers, justifying higher prices. Much of the capital for maintenance and improvements will occur this winter, particularly on making one building more weatherproof, and the significant upgrades will take place in the winter of 2023-2024 due to the time required for design and implementation.

Okay, great. Thank you.

Thank you.

Thank you. The next question is coming from Duane Pfennigwerth of Evercore ISI. Please go ahead.

Hey, thank you. Good morning. On your comments regarding urban markets, leading the improvement in 3Q, was this a leisure driven improvement or business travel, just thinking about some commentary from the likes of United about extended leisure peaks? Every weekend now behaves like a holiday weekend? I'm not sure if you take it quite that far. But where would you push back on the view that this was all sort of leisure driven improvement in urban markets?

Well, first of all, we have a lot of properties where our corporate transient business is actually at or above 2019 levels. So, as we track just like the airlines do, Duane, obviously we track the accounts that do contract with us, and their use. And we've seen a dramatic increase in that level of use of corporate accounts. So, that's one indicator we look at, clearly our group business is up in our city markets. That is primarily business group. We don't do a lot of leisure groups in our cities, we do some, but most of it's in our resort properties. So, it's honestly, it's not, it's not even in question about the increase in business transient and group and citywide business. And we look at the attendance there. And the pickup in those group blocks, which has increased dramatically in the third quarter versus earlier in the year. And then we look at weekday occupancy, which is a pretty good proxy. So, you look at your Tuesdays, your Wednesdays, in particular, right mid-week. And those occupancies are up four, five points sequentially from the third quarter.

That's a good answer to that question. My follow-up is more of a comment than a question but to the extent you are repositioning food and beverage at Naples, here is one vote for bringing back the cabs. And thanks for taking the questions.

Thanks. Well, Phil, Phil McKay would be, he'd be really happy if we did that, but he was the one who eliminated it.

Thank you.

Go ahead, Donna.

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

Hi, good morning. Just had a question on Leisure RevPAR growth, I guess algorithm for next year, particularly in the resort side. I think you mentioned that rate has been very strong, obviously, but occupancy still below prior peaks. Where's the incremental architecture that come from for the resorts? How's pricing looking like next year on top of these rate levels now, I guess, what's the prospect for continued RevPAR growth next year? And this kind of excluding kind of like renovation bumps?

Yes, I think most of the recovery at our resorts is going to come from two areas. One is the return of festivals and market events and activities in those markets, and a willingness on the part of the consumer to participate in those larger human activities, if you will meaning they're more comfortable with the state of the virus in society, and the risk they're willing to take. But probably the bigger one would be the return of group which we've been seeing, which we do a lot again, I've talked about this in the past, we do a lot of group at our resorts. I mean, we do historically we do 60,000 plus rooms at Paradise Point as an example, we do almost 50,000 at Mission Bay Resort, we'll do 30,000 plus at Margaritaville. So, the return of group, which has been occurring, will continue to add occupancy to the resort properties in the portfolio. Now the rates will not be at the same level as leisure. So, the average rates at some of those properties that are bringing back group are going to be bringing it back at a lower rate, but it's going to positively impact RevPAR and have a very positive impact on F&B and other revenue at the properties that will help deliver higher EBITDA at the bottom lines. And the rates they're coming in at next year, I think overall for the portfolio, I don't have the resort alone handy. But overall on the portfolio for 2023 year-over-year, we're up about 14% in group revenue on the books versus where we were a year-ago for this year and about half of that, a little under half of that is rate and a little more than half of that is group. And Gabby has flipped me the pace on resorts, the rates up $30 at our resort property. So, again, it's about the same level, it's probably 6%, 7% when you think about where that is compared to this year.

Sure, well, based on our current outlook, it would imply about $100 million or so of NOLs that we will be bringing into 2023. And then we'll see how next year looks like, and how those would be used up. And of course, those can be used up not just from positive operating performance, but also sales if we have some gains. So, that obviously will move around a little bit, but I think given where our view of the world is unless there's a significant change in the outlook due to the macro challenge, having some sort of dividend as we get into the second half of 2023 is likely would be required, because we used up our NOLs and our positive income would require one. So, we'll work through that. Obviously, it has to be approved by the board. But you should expect something unless there's some unusual thing in the world that occurs, sometime in the second half of 2023.

And I think one answer to a question you didn't answer but I think is relevant is if we had no NOLs today, our forecast for '23 would be a need to pay about $1 a share.

All right, thank you for that, very helpful.

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

Good morning, everyone. Jon and Ray, as we look towards the fourth quarter, I'd like to hear your thoughts on the relationship between two major themes that many people are curious about. These are the status of urban recovery, which seems to be progressing positively, and the potential return to seasonality in leisure. When considering these factors together, it appears that if we adjust for LaPlaya, the fourth quarter may look quite similar to the third quarter. I'm wondering why we aren’t seeing an additional boost in urban recovery, especially considering occupancy rates, improvements in certain markets, and the renovation investments you've made. Could you help clarify why we might not see that extra growth from this point?

Sure. There are really three factors to consider. First, we experienced a minor impact from the hurricane during the first week to ten days of October, particularly affecting areas beyond LaPlaya. The hurricane affected Florida and the coast, leading to numerous cancellations that weekend and into early the following week at locations such as Jackal, Margaritaville, Naples, and Key West, where the hurricane hit just before reaching Naples. While this impact is marginal, it becomes significant when we discuss potential improvements of three to four percentage points in a quarter and see one or two of those points lost to the hurricane. The second factor is that we are initiating some redevelopment projects in urban markets starting in the fourth quarter, contingent on obtaining permits. These projects will commence in Downtown San Diego at both Hilton Gaslamp and at Solamar, which is being converted into Margaritaville. We've already begun exterior work on the Solamar, including painting it in the Margaritaville green color. Lastly, we talked about a return to normal patterns and the effect of convention calendars in various markets. Boston, DC, and San Diego all had strong third-quarter calendars compared to 2019, but the fourth quarters are not as robust. This is another marginal impact that, at least in our case, is affecting our sequential improvement compared to 2019 in the fourth quarter. It's important to note that the high end of our range for RevPAR, excluding LaPlaya, is flat, with a slight increase of 1.5%.

Right. Thank you for that. And I know there is probably some conservatism in there a little bit too. So, then I guess the second question would just be thinking about maybe a little bit broader for the industry, it does feel like in recent weeks as we cut the data, urban occupancy has probably leveled out more broadly even sort of not in just Pebblebrook's market. You guys watch the industry stats as close as anyone. Can you just give us your thoughts on I mean is this kind of it? Or do you think there is something else that can kind of drive or change corporate behavior increasingly from here? Again, I think we were probably a little bit more optimistic about that a month ago or six weeks ago. And I am kind curious to get your take.

I don’t believe this is the peak. We still have a significant way to go sequentially. We are entering a period that is typically slower for business travel. Additionally, the return of holiday effects, such as Halloween, is having a negative impact. This particularly affects the week before and after Halloween, which is why we prefer to move Halloween to Saturday night every year. Looking at our markets and the corporate sector, we see that Santa Monica, which had been slow to recover due to its tech and venture capital focus, is showing signs of returning to transient levels similar to those of 2019. I expect this trend to continue across various urban markets as well. Therefore, I don't think we are leveling out. We need to be cautious about the seasonal slowdown as we approach mid-November and beyond, through to March, which will not reflect sequential growth compared to the previous months due to the typical seasonal decline.

Yes, one factor that affects business travel is airline capacity. We have been tracking TSA data, which has remained in the 90%-95% range compared to 2019, mainly due to a shortage of pilots. However, as noted in other airline reports, they are training and increasing the number of pilots. This should help restore capacity to pre-pandemic levels. Although many planes are still operating at reduced capacity, every seat is filled. As we see an increase in available flights, there will be more opportunities for business travel.

Yes, thank you very much, Ray, appreciated both.

Thanks, Shaun.

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

Thanks. Good morning, everyone. Just one P&L question from me. Did you guys see any expense pressures tick up during the third quarter? And are you seeing anything improve or worsen now that we're in 4Q or as you start your budgeting process for '23?

Energy is a pressure point and will continue to be so. This is definitely an area we are highlighting. Regarding other inflationary costs, such as labor and input expenses, we have implemented several strategic labor increases throughout the year to attract top talent to our hotels. Therefore, I would say there is likely less pressure on those costs year-over-year compared to earlier. Input costs remain high, but energy is the one area that continues to rise, which will make for a challenging winter.

I think one other thing we have to look forward to is that we have claims for property tax assessments from the last few years that, in many cases, did not decline with the pandemic. We believe there will be significant wins there, potentially saving millions of dollars. However, it will take time; in some situations, it could be as long as five years from the assessment year. In other cases, if there is a resolution before litigation, it may be two or three years. We are getting close to some of those cases beginning to get resolved, and ultimately, we should start to see some easing of the property tax increases that we have continued to experience despite the negative impact of the pandemic on our industry.

Got it. And just one follow-up there, are you seeing any divergence between urban and your resort properties on the expense side today?

The resorts have likely increased a bit more because they are located in areas with significant competition. This sector was among the first to recover. Cities, on the other hand, often remain stable and adhere to union contracts in that area, regardless of union status. That would be the primary distinction I would point out. One positive development we've observed is the return of H-2B and J-1 programs, along with the administration's decision to increase the maximum number of H-2Bs, which has never happened before. This will benefit our industry, particularly seasonal resorts.

Great. Thank you both.

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

Hi, good morning, guys. Jon, not to beat the whole sequential change to death, but when I think about the same-store RevPAR versus '19, right, going from a 1.5-ish to flatter to your midpoint ex LaPlaya. I think you said there were three items there, the hurricane impact, the rental disruption in San Diego, and seasonality. If we throw seasonality out because I assume seasonality was around in '19, right? And no recent calendar changes or anything we should know about, but can you quantify the hurricane, if we didn't have the hurricane impact and maybe if we didn't have the renovation disruption, although I'm guessing how active you were in '19, you probably had some disruption there. Where would that same-store RevPAR guidance be for the fourth quarter?

Yes, to clarify, the comment about Q4 compared to Q3 wasn't related to seasonality. The third point was about how the convention calendars are scheduled. When we compare this to 2019, the comparisons for San Diego, Boston, and D.C., which are important to our portfolio, were not as favorable. Looking ahead to next year, the calendars for these cities are all projected to be up compared to 2019. While we expect some quarterly fluctuations in those markets, I don’t have specific details at the moment. Regarding the impact from the hurricane, we don't yet have the October numbers; those will come in about two weeks from the property teams. Also, we did have some redevelopment effects in 2019, although I don't remember the exact properties involved.

Okay. It's an interesting discussion that I'm increasingly having with investors. I want to ensure we understand the progression from the third quarter to the fourth quarter. Thanks, Jon.

Yes, and thanks. I think if there were signs of a stall, we would let you know. We have monitored other companies like Visa, American Express, and airlines for the fourth quarter, and none of them seem to be reporting a stall in the recovery. Rest assured, we will inform you if we notice any changes. Thanks, everybody for participating. Those who are still here and hope you enjoyed the song that we provided for you. It's a classic. And we look forward to seeing you in San Francisco at NAREIT.

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